Nov

28

Anyone have any favorite good luck charms/rituals to help with trading results?

Peter Ringel writes:

some of the old floor traders, we had on this list, reported how superstitious some of the traders were. Cloths, bathroom time…

Asindu Drileba comments:

Lucky charms may sound delusional but they are actually more common than we think. They are more like placebos. I take pill X, my headache goes away. (But pill X is made from wheat flour and a bitter "filler" and has exactly zero pharmaceutical contents, yet it works).

Have you ever pushed the button that opens the door of an elevator? Well, those buttons are completely fake! Elevator doors are pre-programmed to open and close at hard coded intervals. Pushing the button does nothing. They simply exist to give people a sense of control.

Nils Poertner writes:

To have a strong belief one can learn (from mkts or others) is a good start.
ie allowing for mistakes to happen, not fretting them. (many cultures are guilt-ridden, like the German culture on so many fronts. All it takes is sometimes to muster up enough courage and learn from mistakes and don't judge).

Zubin Al Genubi offers:

I'm reading Kidding Ourselves, Hidden Power of Self Deception, by Hallinan, in which he describes real physical and psychological effects of psychosomatic causes such as death, hallucinations. You see what you want to see. You are and become what you believe yourself to be. It affects health, performance, money. He also describes how a feeling of lack of control can be debilitating and even deadly. Some feel a lack of control in that they don't control the market, but one can easily (physically at least) click the keys to buy and sell any time.

From scientific studies: Our results suggest that the activation of a superstition can indeed yield performance-improving effects.

Nov

25

Zapped: From Infrared to X-rays, the Curious History of Invisible Light

From beloved popular science writer Bob Berman, ZAPPED tells the story of all the light we cannot see, tracing infrared, microwaves, ultraviolet, X-rays, gamma rays, radio waves and other forms of radiation from their historic, world-altering discoveries in the 19th century to their central role in our modern way of life, setting the record straight on health costs (and benefits) and exploring the consequences of our newest technologies.

Nils Poertner suggests:

The HoHo Dojo, by Billy Strean.

Laughter and humor are therapeutic allies in healing.

Nov

23

Whether it is the "Mambani win", Brexit, Covid, Ukraine war, whatever - had someone told me 6 months before that this could happen - the answer would have been "no-way…" whereas in 20-20 hindsight - it is always like "oh yes, there were obvious signs."

Zubin Al Genubi responds:

History is made on the edges by outliers which shifts the averages way over in its direction.

Nov

17

I see they are down [at least through Q2]:

FRED: Corporate Profits After Tax (without IVA and CCAdj)

Steve Ellison responds:

Interesting. S&P 500 earnings per share were up both year to date and year over year. And Q3 so far looks better than Q2.

S&P source spreadsheet: Click link to download file: S&P 500 Earnings.

Big Al wonders:

So maybe the big firms are doing better than the smaller ones?

Nils Poertner remembers:

Investment Bank earnings 2007…My very cerebral friend Maurice at the time: "IBs are cheap - look at their PE ratios."

Sep

8

Dutch scientist Christiaan Huygens found in the 17th century that larger pendulum clocks will sync smaller ones.

Video by Veritasium: The Surprising Secret of Synchronization

Pendulums in the human world = our various belief systems (which are sometimes in competition to each other and go deep). Two examples perhaps: in finance: a trader has religious reasons why he /she does not think he deserves the STELLAR gains. Ways are found to turn accumulated gains into a loss! in health: why do some ppl stay sick and others recover miraculously against all odds?

Zubin Al Genubi writes:

The Kuramoto mathematical model describes synchrony in networks. The line between order and randomness occurs at the phase transition when the network nodes synchronize.

Building on Kuramoto's model, the Watts and Strogatz model makes testable predictions about interventions most likely to trigger cascades.

In small world network terms there are "vulnerable clusters" in the market. In market terms the vulnerable clusters are weak hands, funds faced with margin calls, or fund hitting a stop losses. Obvious 2d points or tipping points are stop points at prior lows. If a vulnerable cluster is close to the second tipping point, it can ignite a cascade.

Nils Poertner responds:

Mathematicians often find something which ordinary people know intuitively. 2 more examples:

1. Five teenagers bully a victim. Knock-out the strongest in the group and the rest will fall too (big bully was the dominant pendulum, trumping the small ones).

2. When the most valuable firm(s) in an index suddenly struggle (NVDA?), it often means bad things for wider index.

Asindu Drileba adds:

I found the same pattern in the "Complex Systems" community. An example in Secrets of Professional Turf Betting: The idea of "copper the public opinion" & "principle of ever changing cycles" are an intuitive description of the minority game & El farol Bar problem in complex systems. Statistical arbitrage is almost exactly what Robert Bacon describes as a "dutch book."

In Neil Johnson's Simply Complexity, he derives an insight that currency traders have (knowing what currency is "in play") using graph theory.

I think Simply Complexity is a very good book for speculators, since it uses accessible analogies and no complicated math. The book has a lot of analogies regarding the market. The most relevant section for Specs would be, Chapter 4: Mob Mentality (I however enjoyed the entire book).

A Few excerpts:

The bar-goers who tend to shift opinions about whether to go with history or against it, tend to lose more and hence eventually change their p value.

This reminded me of people that both go short & long in the market (I am long only). P is the probability of an event happening.

Figure 4.3 from the book and its caption:

We are naturally divided. The final arrangement of a collection of people, in the case of a bar where the comfort limit is around half the number of potential attendees. This shows the emergent phenomenon of a crowd who think that history repeats itself, and an anticrowd who think that the opposite will happen. Hence the population polarizes itself into two opposing groups. This polarization of the population represents a universal emergent phenomenon. It will arise to a greater or lesser extent in any Complex System involving collections of decision-making objects such as people, which are competing for some form of limited resource.

The figure is similar to the Arc Sin law of PnL. Something that appears in Ralph Vince's book The Mathematics of Money Management and Nassim Taleb's Dynamic Hedging. Unfortunately, I don't have a good intuition on the Arc Sin law of PnL.

Aug

1

I interpret the "Vig" as the collective term for:

1) bid-ask spread (difference in prices between buying & selling) due to market makers
2) transaction fees (for limit & market orders) charged by the exchange
3) slippage (an instrument is more expensive the deeper in the order book you go) due to how liquid an asset is.

Possible solutions for each?
1) Can be fought with the exclusive use of limit orders instead of market orders.
"Be patient and you will have the edge", The Chair in, Practical Speculation — The fine art of bargaining for an edge
2) I noticed (at least in crypto markets) that the more volume you trade, the less fees you pay (on a percentage basis)
3) Restrict yourself to deep and very liquid markets.

Also, one technique is to trade as less often as you can (buy & hold). That way you will automatically pay less of all the three sources of Vig. I think this is so important as I often found many "edges", then accounted for the vig and they often became loosing strategies.

Big Al writes:

I would also add "opportunity cost" as part of the "Meta Vig" (MV), i.e., the total costs associated with trying to trade the markets. The MV would also include the negative effects of cortisol on the human body.

Henry Gifford suggests:

I think two good steps are to ask others what the big is, and to try to calculate it yourself. Both exercises will no doubt be educational. A few times over the years I have asked horse bettors what the big is, but none seemed to know. As for calculating yourself, one hopefully will learn how much it varies by, and maybe also gain insight into hidden vig.

Steve Ellison responds:

There is no free lunch with limit orders because of adverse selection. Sooner or later, you will place a limit order on a security that simply moves up and never looks back. It would have been your best trade ever, had you actually been filled. In the opposite scenario, for example when I bought Coca-Cola in 1998, and it was already down 25 percent by the T + 3 settlement date, you will of course be filled.

Studies of retail investing accounts have shown a negative correlation between number of transactions and investment returns. In one study, accounts that had been inactive for 18 months because their owners had died, and their estates had not been settled, outperformed the vast majority of their retail account peers.

Peter Ringel writes:

Generally, the lower you go ( smaller time frame - smaller scope of the trade ) the larger the relative Vig costs. a subclass of opportunity costs is spent time of (daily) preparation. my required prep is nearly the same over many time-frames - but the scope of a trade is way lower for lower time-frames. in cash equities, the resale of your order-flow by your broker to some HF shop can be counted as Vig too. is this a common practice in option markets too? Yes, the Vig greases the fin-industry, but it is mostly unavoidable paying / avoiding the Vig does not lead to success or failure in mkts IMHO.

Vic simplifies:

just trade once a quarterfrom long side

Zubin Al Genubi comments:

The biggest vig is capital gain taxes. The richest people in the world hold their single company stock 10000x and realize no gain. Its very hard to beat a long term hold.

Aug

24

I remember an interview by Vic where he said he did a lot of "counting". Does he mean combinatorics? Or something else. What are some resources where he has talked about this "counting" in more detail?

William Huggins replies:

he literally meant count the data/do the math. at its most basic, statistics is about counting and comparing to the results we would have expected from randomness. too many people form their beliefs because they were told something, or were presented with cherry-picked "supporting" data so the chair's injunction has been to actually check before committing capital.

Zubin Al Genubi adds:

Count the number of: Private Jets, pretty girls, closed businesses, for lease signs, big market drops, increase in vix, number of down days, number of days since last high/low, volume of trades, bids, offers, crashes, all time highs, stocks at new highs/ lows, crosses of round numbers, cigarette butt length, change in price, etc etc.

Test: is number above or below mean/ median? How many standard deviations away from mean? What happened after the time of count?

Penny Brown adds more:

I'll add to the list: the price of thoroughbred horses sold at auction and the length of women's dresses. (long hem below knee is bearish as was style in 70s, short hem in mini skirts is bullish)

Asindu Drileba responds:

Thank you. "Test Everything" is definitely something that keeps coming up whenever I listen to the chair.

Humbert H. asks:

In all these years I could never understand how this approach can coexist with affirming the reality of the ever-changing cycles. Like how do you know when to trust this counting and when the cycles changed on you?

Laurence Glazier offers:

Music is the pleasure the human mind experiences from counting without being aware that it is counting.

- Gottfried Leibniz

Jul

28

Inflection points at prior highs and lows seem pretty obvious recently especially in lowered liquidity. The market makers seem to thin and spread their markets for protection resulting in bigger directional moves. The vol gives a small trader good opportunity as the big boys dump large orders creating large auto trade moves like escalators.

Anatoly Veltman wants more information:

every word I read on three lines of text appears totally (?) random. It would be extremely impressive, if you ventured to explain at least ONE of these, and how this could be used as edge. P.S. Bonus would be to know the approximate date (?) of "lowered liquidity"

William Huggins responds:

It's not random, it's about microstructure. MMs spread their risk as they usually get caught out by information driven moves while they supply liquidity. When they spread their capital to diversify, or withdraw from choppy markets, the price impact of trading rises (Kyle's lambda).

Steve Ellison comments:

My takeaway from Zubin's post is that there are edges to be found in studying market microstructure and looking for clues in price action of what some of the key players are doing. A specific example I have found is, if you bin trading days by number of days before or after options expiration, options expiration day has had the worst total return in the S&P 500 of any day of the month in the past 6 years or so. Apparently the need for a large number of market players to adjust and re-establish hedges can create imbalances in supply and demand of various assets.

I could form a hypothesis about liquidity that a sustained price move in one direction, as happened a couple of times to the downside in the S&P 500 since July 17, is toxic for market makers and forces them to widen their spreads lest they be saddled with unwanted inventory. I'll leave it as an exercise for the reader to test this hypothesis.

Jul

24

‘Greatest Bubble’ Nearing Its Peak, Says Black Swan Manager

Universa’s Mark Spitznagel, who has made billions from past crashes, sees last hurrah for stocks before severe reckoning

Humbert H. asks:

His job is to make money on black swans, not to predict black swans. What kind of black swan is it if it can be predicted?

Asindu Drileba writes:

Black Swans are relative. If you have tail risk protection it means you are aware of tail risk. If you don't have tail risk protection, the notion of a "surprise" when it happens means you encounter a black swan. So Mark may be speaking form the perspective of those that actually don't think they will encounter a black swan.

Humbert H. responds:

Is there anyone who invests in the magnificent seven and NVDA in particular who isn't aware of their elevated valuations, possible bubble formation, and the risk of a major decline? There's some level of obviousness to warning people of this possibility. It's like he is suddenly preaching "past performance is no guarantee of future results" or "correlation does not equal causation". Is he doing this to help humanity? Someone will make more money and someone will make less money if they act on his warning, and there will be bagholders either way, so humanity will not benefit as a whole.

Asindu Drileba adds:

I think for his case, he is just marketing his fund.

Zubin Al Genubi observes:

Cheap Deep OTM puts are up 45% on a 3% decline showing exponential gearing in place from ATH as a directional trade or as a hedge. Surprisingly unidirectional.

Asindu Drileba expands:

His philosophy is more like that of "insurance" for stocks. I think Uncle Roy also has the same philosophy. I remember his describing portfolio protection akin to having fire insurance for your house. To benefit from fire insurance on your house, you don't need to predict when it will burn down. Just make sure you always have coverage for it. So most of the time, percentage wise, your predictions of having a fire are going to be wrong. He mostly advocates that everyone should have "fire insurance" for your portfolio.

To learn more about Mark's strategy:
1) A section called "The Forest In the Pine Cone" inside his book The Dao of Capital
2) His solution to the "narrow framing" problem
3) How he sizes his positions

Nils Poertner comments:

good to be open minded. that said: the more stories (like this one) we can read in mass financial media (FT, WSJ, etc) - the less likely this is going to play out anytime soon. "get the joke"

Humbert H. writes:

I don't think it makes any difference unless "everybody" has the opposite view of the future from what the market is doing. Every single day multiple people prognosticate both doom and gloom and full steam ahead. Since the motivation for this warning is clearly suspect this is white noise. But if his prediction comes true soon which it obviously has a reasonable chance of doing he'll be venerated for decades as the great prophet. This guy is clearly a disciple of Taleb, and they even collaborated in the past. Victor's take would be interesting.

Jul

20

First the chart. The two data sets are of different magnitude, so to compare them they must be normalized. The chart represents the slope of the data divided by the trend of that data. Both are determined by regression over 12 months. Each point on the chart is effectively the expected rate of change of the data as determined by the moving trendline. As such, the data is NOT lagged, and presents a truer picture than that of lagged data.

Interpretation. Periods of higher part-time employment tend to coincide with recessions. However, if the employment picture is recessionary, then how would one explain the growth in Payroll Tax Receipts, which I have shown separately? Well, it turns out that the growth from January to June in Part-time employment matches the growth in Payroll Tax Receipts. Thus, the economy is growing solely by the increase of part-timers.

Zubin Al Genubi writes:

Many young people I know do gigs, seasonally or part time. Recent employment numbers (with temp way up and full-time way down)support the theory.

Humbert H. adds:

I’ve seen a lot of information on part-time vs full-time. Often it’s accompanied by foreign-born vs native-born, where the dichotomy is similar, in favor of the foreign-born.

Jul

15

Only some people agree, but the power industry believes there may be a demand-supply mismatch from AI data centers. Here are some summary views - from the American Nuclear Society's Nuclear Newswire (April 2024):

Major tech companies see artificial intelligence (AI) as something that will transform their industry, and there is a race to be first. When they look for clean, dependable power 24/7, nuclear clearly stands out as a good match. Constellation [the nation's largest nuclear utility] summarized it best in its recent forecast:
• AI and data center growth will drive power demand.
• Major tech companies are expected to invest $1 trillion in data centers over the next five years.
• In the next five years, consumers and businesses will generate twice as much data as all the data created over the past 10 years.
• AI data center racks could require seven times more power than traditional data center racks.
• Between now and 2030, domestic data center electricity consumption is expected to grow anywhere from 6.5 percent to 7.5 percent (335 terawatt-hours to 390 terawatt-hours).
• In its report, Data Centers 2024 Global Outlook, global real estate services company JLL has said that "AI is driving extreme scale for new developments with requirements now ranging from 300 megawatts (MW) to over 500 MW."

From the IEEE Spectrum (June 2024):

Scientists have predicted that by 2040, almost 50 percent of the world's electric power will be used in computing. What's more, this projection was made before the sudden explosion of generative AI.

From Data Center Dynamics (May 2024):

US utility Dominion expects to connect 15 more data centers to the grid in Virginia over the course of 2024, after connecting 15 facilities last year totaling almost a gigawatt of capacity [1 gigawatt = 1 nuclear plant]. In its most recent earnings presentation this week, the company said it had connected 94 data centers with more than 4GW of capacity in Northern Virginia since 2019. This included 15 data centers totaling 933MW in 2023, and 15 more are due to be connected in 2024. The company didn't include the capacity of those 15 facilities going live this year, and in the earnings call, CEO Robert Blue said he doesn't know how quickly they will ramp up to full capacity.

For those who think new nuclear power is the solution (2024), this is not a quote but a fact: The new Vogtle nuclear power plant took about 20 years to design and build, from concept to commercial operations. This recent construction schedule was set by an experienced nuclear utility that previously built access to transmission on a nuclear site they've owned for decades.

The critical metric is not the overall demand. Data centers' demand sits on the grid 24/7, so generating capacity must be available 24/7. While massive amounts of energy are already oversupplying some US power markets, most new sources originate from part-time wind, solar, and battery assets. Those part-time assets cannot serve the 24/7 load demanded by data centers. Therefore, the critical metric is the difference between the base supply and the constant load.

With growing 24/7 demand, a fleet of legacy power plants (natural gas, nuclear, coal) is needed to fill in the [significant] gaps left by part-time renewable energy sources. That fleet currently exists, but its overall capacity is declining. Retired plants (to the extent they can be summoned) and new generation will be needed.

However, any new base generation will experience poor capacity factors and difficult gross revenues. Both impair investors' revenues and erode their expected levelized cost of energy. Even if investors overcome profitability concerns, the time it takes to commercialize any new traditional generating asset exceeds the expected demand for new power (extreme example: Georgia Power).

These projections and concerns appear to contradict current trends. Demand has declined in the United States, Europe, and the United Kingdom. Current reporting suggests there could be too much supply, particularly in Europe. However, if projections described by ANS, IEEE, and utilities are correct, the opposite problem could be presented: insufficient supply. If supply becomes the issue as expected, scarcity curves will be taxed, unprofitable generating assets will become profitable, and residential, commercial, and industrial consumers will pay more. This issue is not limited to North America.

Humbert H. writes:

I was listening to an interview of some fund manager from Reno earlier today and he was talking about power shortage around where he lives due to AI server farms. He said they could be quickly and cheaply addressed with new gas powered plants, but due to the Biden administration now requiring all such plants to have complete carbon sequestration this stopped them from being a practical solution.

H. Humbert writes:

Increased the energy supply for data centers is the obvious and near-term brute-force solution. Of course (almost) everybody not in the tech industry assumes that the joule per bit per second for data centers can't be improved and hence producing more energy is the only solution using nuke. In fact Sam Altman said that too, what conventional thinking can possibly go wrong, right?

Zubin Al Genubi asks:

What would be a good way to invest in modern nuclear power? How about Bill Gates project?

Asindu Drileba adds:

I would suspect via buying Uranium ETFs? I first saw this conjecture from following the financier Lyn Alden.

Mark Zuckerberg of recent also mentioned in an interview that Energy and not Compute will be the number 1 bottle neck to AI progress.

H. Humbert responds:

The energy being the presumed AI investment proxy won't last in the long term. Increasing the energy supply is just an incremental engineering no-brainer approach to solve a longer term problem and the approach is not disruptive and it doesn't change the world.

Stefan Jovanovich offers:

Radiant Nuclear
Kaleidos: a Portable Nuclear Microreactor that Replaces Diesel Generators

Peter Penha writes:

A relevant interview on the Hidden Forces podcast with Brian Janous who was hired by Microsoft in 2011 to focus on energy (Google had just hired someone themselves as they thought the cloud might become something) - wound up as VP of Energy.

AI data centers need to be where they can individually draw the electricity of a city like Seattle (800 MWh) - so away from major urban areas - discusses the history of the grid from Sam Insull through to where we are going…also on the efficiency / consumption of AI chips - his view with AI is Jevons Paradox will apply and the more efficient the chips and the (new) grid gets the more consumers will demand.

Jun

29

Seen yesterday in Kona Hawaii, billionaire's playground:

1 private jet at FBO. Very unusual.

25% commercial vacancies in prime retail.

Tourism down 9%

(Galtonesque count)

Stefan Jovanovich comments:

ZAG's reports are a treasure - and a source of future profits.

Nils Poertner wonders:

easier to be bullish on European /UK equities than having bearish view on US stocks?

Jun

15

Lots going around about how NVDA dominates; and MSFT, NVDA and AAPL now account for about 20% of the S&P 500. I was curious to see what happened in a toy index and so did an experiment (using R):

1. Create an index of 500 stocks, each with a starting value of $100.

2. Each year, for 40 years, each stock's value is multiplied by 1 + a value randomly drawn from a normal distribution with mean 8% and sd 15%, roughly what you might see with the S&P 500.

3. The starting value of the index was $50,000. The final value after 40 years was $1,152,446.

4. The final summed value of the largest 10 out of 500 stocks was $142,320, or 12.35% of the 500-stock index.

I was curious to see if megacaps would emerge from a simple toy model. I ran it only once, and they did. For me, this is a comment on the perennial alarm stories about "Only X% of stocks account for Y% of the market!" Even with a simple model, you wind up with something like that.

Adam Grimes agrees:

Can confirm. Have done variations of this test with more sophisticated rules, distribution assumptions, index rebalancing, etc. Get similar results.

Peter Ringel responds:

so we can take this ~12% of the index as a base value, that develops naturally or by chance? Then a clustering of being 20% of a total index (only greater by 8%) does not look so outrageous.

William Huggins is more concerned:

keep in mind it's 10 companies making up 12% (~1.2% each) vs 3 companies making up 20% (8.3% each) - in that sense, the concentration DOES look pretty high. am reminded of when NT was 1/5 of the entire CDN index in 99/00.

Peter Ringel replies:

You are right, I failed to catch this difference of only 3 stocks. In general, I am not so much surprised about the concentration. Money always clusters. Always clusters into the perceived winners of the day. Should they blow up, money flows into the next winner. To me, the base for this is herd mentality.

Adam Grimes comments:

It's Pareto principle at work imo. I'm not making any claims about exact numbers or percents, but as you use more realistic distribution assumptions (e.g., mixture of normals) the clustering becomes more severe. There's nothing in the real data that is a radical departure from what you can tease out of some random walk examples. Winners keep on winning. Wealth concentrates. (As Peter correctly points out.)

Asindu Drileba offers:

Maybe you try replacing the normal distribution of multiples with a distribution of multiples constructed with those historically present in the S&P 500? It may reflect the extreme dominance in the market today.

To me, the base for this is herd mentality.

It is also referred to as preferential attachment:

A preferential attachment process is any of a class of processes in which some quantity, typically some form of wealth or credit, is distributed among a number of individuals or objects according to how much they already have, so that those who are already wealthy receive more than those who are not. "Preferential attachment" is only the most recent of many names that have been given to such processes. They are also referred to under the names Yule process, cumulative advantage, the rich get richer, and the Matthew effect. They are also related to Gibrat's law. The principal reason for scientific interest in preferential attachment is that it can, under suitable circumstances, generate power law distributions.

Zubin Al Genubi writes:

Compounding of winners is also at work and returns will geometrically outdistance other stocks. No magic, just martini glass math.

Anna Korenina asks:

So what are the practical implications of this? Buy or sell them? Anybody in the list still owns nvda here? If you don’t sell it now, when?

Zubin Al Genubi replies:

Agree about indexing. Hold the winners, like Buffet, Amazon, Microsoft, NVDIA. Or hold the index. Compounding takes time. Holding avoids cap gains tax which really drags compounding. (per Rocky) Do I? No, but should. It also works on geometric returns. Avoid big losses.

Humbert H. wonders:

But what about the Nifty Fifty?

Jun

1

Numberphile Video demonstrating that a cone that is 80% full in height is actually 50% full in volume. You will also know if your getting scammed in a bar.

Cones are MESSED UP - Numberphile

Zubin Al Genubi writes:

This is why convexity, compounding, and geometric or exponential growth are hard to comprehend.

Kim Zussman comments:

Geometric returns are important when assessing performance. From an investor's perspective, average returns underweight when a manager loses everything (because it is sum-based), but geometric returns don't (because it is a product).

Geometric mean

May

27

Right, that Comey, fired as head of the FBI. But the book is a good murder mystery by someone who obviously knows law enforcement and investigation, and has a real nice human touch. Recommended. Also it has a pretty funny dig on the hedgies…right, that Westport.

Westport, by James Comey:

It's been two years since Nora Carleton left the job she loved at the US Attorney's Office to become lead counsel at Saugatuck Associates, the world's largest hedge fund. The career change also meant a change of scenery, relocating her to Westport, Connecticut, fifty miles north of New York City. But it was worth it to get her daughter, Sophie, away from the city. Plus, she likes the people she works with. Especially Helen, who recruited Nora because of her skills as an investigator.

Then, Nora's new life falls apart when a coworker is murdered and she becomes the lead suspect. Nora calls in her old colleagues from the US Attorney's Office, Mafia investigator Benny Dugan and attorney Carmen Garcia. To clear Nora's name, Benny and Carmen hunt for the true killer's motive, but it seems nearly everyone at Saugatuck has secrets worth killing for. As Benny sets out to interrogate her colleagues, Nora examines her history with the company to determine who set her up to take the fall.

May

26

This modern Jack Aubreyesque story of naval warfare is some of the best fiction I've read recently. Lots of action written in beautiful prose.

The Oceans and the Stars, by Mark Helprin.

A Navy captain near the end of a decorated career, Stephen Rensselaer is disciplined, intelligent, and determined to always do what’s right. In defending the development of a new variant of warship, he makes an enemy of the president of the United States, who assigns him to command the doomed line’s only prototype––Athena, Patrol Coastal 15––with the intent to humiliate a man who should have been an admiral.

Big Al recommends:

Covers key psychological issues around trading, with clear action steps:

The Mental Game of Trading: A System for Solving Problems with Greed, Fear, Anger, Confidence, and Discipline, by Jared Tendler.

Khilav Majmudar is reading:

Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life, by Emanuel Derman.

Ferdydurke

In this bitterly funny novel by the renowned Polish author Witold Gombrowicz, a writer finds himself tossed into a chaotic world of schoolboys by a diabolical professor who wishes to reduce him to childishness. Originally published in Poland in 1937, Ferdydurke became an instant literary sensation and catapulted the young author to fame. Deemed scandalous and subversive by Nazis, Stalinists, and the Polish Communist regime in turn, the novel (as well as all of Gombrowicz’s other works) was officially banned in Poland for decades. It has nonetheless remained one of the most influential works of twentieth-century European literature.

Vic adds:

The Oceans and the Stars, and The Whole Story: two excellent books that have similar trajectories and conclusions - struggle, with love conquering adversity.

Vic's twitter feed

May

12

A carry trade is borrowing/buying at low interest and selling/lending at higher interest rates using leverage. Its used in currencies. The authors propose the trade had become systemic including the FED such that the markets have disconnected from fundamentals and are moved by dynamics of the carry/bust pattern. Further that it is the main driver of economic cycles not classic economic supply and demand.

If so, maybe the Fed watch traders are not always wrong as I've stated and the bad news is good news idea has merit under the carry trade.

Humbert H. writes:

Is there anyone who has done this for decades and not blown up, other than maybe Palindrome? Leverage combined with simultaneous forex and interest rate bets seems like it will eventually blow up, unless you always get advance warnings from central bankers.

Jeff Watson expands:

In the grain markets we determine the cost of carry as Futures price = Spot price + carry or carry = Futures price – spot price. Carry consists of storage costs, insurance, and interest. Carry provides the farmer with signals helping with crop marketing decisions while it provides a trader an opportunity to capture the carry. As an aside, here’s a handy dandy little formula to play around with:

F = Se ^ ((r + s - c) x t)
Where:
F = the future price of the commodity
S = the spot price of the commodity
e = the base of natural logs, approximated as 2.718
r = the risk-free interest rate
s = the storage cost, expressed as a percentage of the spot price
c = the convenience yield
t = time to delivery of the contract, expressed as a fraction of one year

Steve Ellison adds:

The US stock market had a carry trade from 2008 to 2018 and again in 2020 and 2021 when zero interest rate policy made it possible for traders to buy stocks with borrowed money, and cover the interest costs using the stock dividends. Philip L. Carret wrote in his 1931 book The Art of Speculation that the best time to buy stocks is in such situations when stocks "carry themselves".

As a quick approximation, the prices of the front-most ES contracts are:

June 5225
September 5282

So the cost of carry at the moment is roughly 47 points per quarter, and the S&P 500 is not carrying itself (if it were, the contracts would be in backwardation).

May

2

Smörgåsbord for the beginning of May

Zubin Al Genubi recommends:

Market Tremors: Quantifying Structural Risks in Modern Financial Markets

Clear exploration of potential causes of and prediction of volatility events caused by Dominant Agents. Explores imbalances created by ETFs ETNs Banks, FED Market Makers.

Asindu Drileba suggests chaos:

Doyne Farmer describes the relationship between Roulette Wheels, The Weather, Financial Markets, and Economies as a whole. He thinks companies that don't make the energy transition from fossil fuels will all go bankrupt in the next 5 years. He is also promoting his new book:

Making Sense of Chaos

Here is the discussion:

Simplifying Complexity: Making sense of chaos with Doyne Farmer

Nils Poertner points to probability:

Birthday problem

stochastics is really quite counter-intuitive - it deals with "uncertainty" rather than basic algebra or geometry which one learns in schools. good training ground for learning about markets as well. (always found that stochastics often attracts folks who are a bit off the normal conventions / and have an genuine curiosity in things rather than go with what is fashionable)

Apr

17

Bits and pieces

April 17, 2024 | Leave a Comment

Zubin Al Genubi on market prices:

Twenty S&P points used to be a good trading day. It still is, but now 50 points is the new normal. Need to recalibrate mentally and recalibrate old systems. It's a dichotomy between points and percentages as the prior Rocky/Vic argument discussed. The higher price has resulted in a stealth increase in leverage. Announcements widen spreads and create great small entry points. The FED speak traders are always wrong and offer great opportunity. Why are they wrong? Bad news is not good news.

I've read that the current market price is always right. I disagree. The market price is set at the margin by a few, maybe several hundred participants with a variety of reasons for transacting. The reasons are often wrong and the price is wrong at that moment. This can be used to advantage either in patterns prospectively, or in the case of liquidity holes on the fly.

Big Al suggests:

Daniel Kahneman on Cutting Through the Noise | Conversations with Tyler

Andre Agassi tennis hack against Boris Becker

Nils Poertner on effortless learning:

When learning a foreign language, we learn the best when being PRESENT and don't fret to get it right all the time. This being right puts a huge amount of unnecessary stress on the student. To some extent it seems the same in trading: we don't need to know everything in advance - far more important is to be PRESENT.

Easan Katir on an old book:

NHK offers a sensitive review of In Praise of Shadows. The book is by Juni'chiro Tanizaki, one of Japan's eminent novelists. Market relevance? One can muse on how much of market activity takes place in the shadows, the dark pools, the anonymous orders whizzing by on level 2… is there a shadowy level 3, 4, 5 where identities are revealed?

Kim Zussman responds:

Relatedly to spec interests, A Taxing Woman, a nice film about Yazuka/tax evasion at Nippon ATH ca late 80s.

Apr

16

Investors wrongfooted as ‘higher for longer’ rates return to haunt markets

Zubin Al Genubi asks:

Interest alone on US debt is 1 trillion dollars a year! Anyone concerned?

Larry Williams is definite:

NOPE. NOT AT ALL.

Art Cooper, however:

*I* am certainly concerned, in the long term. When the coverage ratio on gov't debt auctions drops close to 1.0, it will be time to take meaningful action, with a major re-allocation of investment portfolios.

Larry Williams responds:

Not to worry…says MMT guys…as long as we are not gold-backed $, it's all just accounting numbers.

Kim Zussman wonders:

Reallocate to what? (he says looking around twice with stocks near ATHs)

Art Cooper suggests:

There are a universe of hard assets out there, including gold (though GLD could easily go far higher). Because I like to emulate the Sage and shop in the bargain basement, I personally find extremely distressed income-producing real estate of interest. Babies are being thrown out with the bath water.

Larry Williams writes:

The public debt is just $ in savings accounts at the Federal Reserve Bank. When it matures the Fed transfers those dollars to checking accounts (aka reserves) at the same Fed. It's just a debit of securities accounts and a credit of reserve accounts. All internal at the Fed. When gov sells new Tsy secs, the Fed debits the reserve accounts and credits securities accounts. Those $ only exist as balances in one account or the other.

Asindu Drileba adds:

David Graeber once mentioned that the US can never default on its debts since the Fed is the largest holder of Treasuries.

William Huggins comments:

its not that the US -can't- default on its debts, its that 70% of those debts are to americans. so what is the probability of americans voting to default on themselves when they have the ready alternative of printing money? more important might be whether or not the 30% foreign holders will keep playing along but that analysis is an exercise in ranking "next best alternative" for them. when one starts looking under the hood at the alternatives, its boils out like china's bank regulator said in early 2009, "except for treasuries, what can you hold? gold? you don't hold japanese government bonds or uk bonds. us treasuries are the safe-haven. for everyone, including china, it is the only option: "we hate you guys but there is nothing much we can do."

H. Humbert replies:

The Americans would be about equally unlikely to default if most of the debt was held by foreigners. If you can print money there is no need to piss off any of your "customers". It's not like things worked out super well for Argentina, at least until they hit bottom.

Apr

15

From Easan Katir:

The Hall of Uselessness: Collected Essays, by Simon Leys.

Simon Leys is a Renaissance man for the era of globalization. A distinguished scholar of classical Chinese art and literature and one of the first Westerners to recognize the appalling toll of Mao’s Cultural Revolution, Leys also writes with unfailing intelligence, seriousness, and bite about European art, literature, history, and politics and is an unflinching observer of the way we live now.

From Zubin Al Genubi:

Pathogenesis: History of the World in Eight Plagues, by Jonathan Kennedy.

According to the accepted narrative of progress, humans have thrived thanks to their brains and brawn, collectively bending the arc of history. But in this revelatory book, Professor Jonathan Kennedy argues that the myth of human exceptionalism overstates the role that we play in social and political change. Instead, it is the humble microbe that wins wars and topples empires.

From Asindu Drileba:

Math Without Numbers, by Milo Beckman.

Math Without Numbers is a vivid, conversational, and wholly original guide to the three main branches of abstract math—topology, analysis, and algebra—which turn out to be surprisingly easy to grasp. This book upends the conventional approach to math, inviting you to think creatively about shape and dimension, the infinite and infinitesimal, symmetries, proofs, and how these concepts all fit together. What awaits readers is a freewheeling tour of the inimitable joys and unsolved mysteries of this curiously powerful subject.

Peter Ringel is watching:

Voltaire: The Rascal Philosopher

I discovered a terrible knowledge gap and missed details of a great one. so many angles to be impressed. his writings seem to be the least of it. he even gamed the king's lottery and won with a group of investors & mathematicians.

William Huggins suggests a somewhat older work:

A General History of The Most Prominent Banks, by Thomas H. Goddard, published in 1831.

its dry - but if you are interested in the 1819 panic, there are some good details. the book is mistitled imo as 3/4 of its pages and 2/3 of its text centers on the history of central/national banking in the united states from 1786 through 1831 (publication). on titular matters, it had a couple of interesting tidbits on the bank of genoa and some "interesting" statistical information for archivists but there are better modern sources on major banks in venice, the netherlands, england, and france (for example, the author skips over how the bankers of geneva funded the french revolution to knock the bank of genoa off its perch, etc). i suspect such deficiencies are because the text was designed as ammo in the "bank wars" of the early 1830s rather than a deep exposition on titular topics.

its exposition on us matters feels remarkably haphazard, i presume because the author's intended audience would have the context to appreciate why it includes what it does, including a description of the bank of north america, hamilton's report to congress on the need for a bank, and a brief on the First Bank of the US. where it begins to shine is in the next set of docs, which includes an auditor's report and statement by the president of the Second Bank of the US on how the panic of 1819 was navigated. it follows with mcduffie's 1930 report to congress on the SBUS (includes more details on the rise and fall of FBUS), and closes with a statistical archive of the "monied institutions of the US" and an appendix on how banking and commercial exchange granularly worked in the 1800s.

Stefan Jovanovich comments:

I was puzzled by the "decline and fall" description, since the Bank did not fail but simply had its charter expire without renewal because George Clinton did not like what Thomas Willing had done as President of the Bank. (Clinton failed to cast what would have been the winning vote for renewal.)

William Huggins responds:

"fall" referring to its near brush with survival, not any sort of mismanagement or fraud as in 1819. mcduffie describes FBUS as the victim of partisan politics, but one of such import that the same party who killed it started calling for a replacement almost immediately.

Stefan Jovanovich adds:

They wanted what Willing would not give them - a central bank that would do what the Fed does now - discount the Treasury's IOUs at par. Can't have a war without that.

Apr

13

This is a topic that keeps appearing when people talk about probability. I don't seem to have a good intuition for it. Is the stock market with memory or without memory? Why? What would be your intuitive explanation of what memory is?

From Memorylessness:

In probability and statistics, memorylessness is a property of certain probability distributions. It usually refers to the cases when the distribution of a "waiting time" until a certain event occurs does not depend on how much time has elapsed already. To model memoryless situations accurately, we must constantly 'forget' which state the system is in: the probabilities would not be influenced by the history of the process.

Only two kinds of distributions are memoryless: geometric distributions of non-negative integers and the exponential distributions of non-negative real numbers.

Humbert H. responds:

Of course it's not completely memoryless otherwise there would be no point to any spec of this list trying to beat the market. It's ALMOST memoryless, and that's why it's hard to beat, but there are still some irregularities, like days of the week, month, season, reaction to events, like increased volatility following a big change. It would have a lot more memory if people didn't try to take advantage of the irregularities, because market participants have emotions and also information doesn't spread instantaneously even in this day and age.

Eric Lindell comments:

Blackjack is with memory, provided the number of decks is finite. As you play with more and more decks, the game becomes less memory-dependent. A small player in a huge market makes trades that are less memory-dependent than a big player's trades. The bigger the portion of the total market a trader trades, the more memory-dependent it becomes.

Wikipedia's discussion of a memoryless probability distribution refers to a poisson process. The time before the next car arrives at a toll booth doesn't depend on the time since the last car arrived — provided the cars' arrivals are truly random. This would NOT be the case with a nonrandom distribution, as when more cars arrive per minute during rush hour.

Zubin Al Genubi writes:

A normal distribution of a series of events, indicates that the events are independent of each other, in that the occurrence of one does not affect the probability of another. Of course the market has memory and emotion. We are looking for the regularities to trade that are not random with a high degree of confidence.

Larry Williams agrees:

Amen! People react in similar fashion to events and those reactions create patterns. Plus, there are unique time elements to many markets; jewelry is mostly sold at Christmas, hogs live and die in 18 months etc.

Penny Brown adds:

Investors who suffer a big, sudden decline in a stock remember it. Often they vow to hold on until they are made "whole". This can cause a stock to sell off as it approaches that spot. But if the stock clears this area, the weak hands are gone, and the stock can move up sharply.

Big Al suggests:

For further study, re the quality of "memoryless" and possible applications:

Markov chain

Hidden Markov model

Also, Vic has referred to Markov processes relating to the market calendar at the top of this site.

Mar

29

Weekend reading

March 29, 2024 | Leave a Comment

Recent list recommendations:

From Zubin Al Genubi:

The New Money Management: A Framework for Asset Allocation, by Ralph Vince.

The Crowd: A Study of the Popular Mind, by Gustave Le Bon.

The Crowd. Must read. In crowds individual lose their intelligence, morals, and judgement and a new entity acts without credulity, irritably, and subject to whims, heroism and depravity.

1177 B.C.: The Year Civilization Collapsed

William Huggins adds:

I enjoyed 1177 BC a few years back as it gave a general overview of the geopolitical state of play towards the end of the Bronze Age. It summarized most of the theories underpinning the "bronze age collapse" which occurred around that time and left less than half the "civilized" world in the state it had been a century before. Doesn't offer much in terms of new evidence but it a decent quick read.

From Nils Poertner:

Tech Stress: How Technology is Hijacking Our Lives, Strategies for Coping, and Pragmatic Ergonomics

Tech Stress offers real, practical tools to avoid the evolutionary traps that trip us up and to address the problems associated with technology overuse. You will find a range of effective strategies and best practices to individualize your workspace (in the office and at home), reduce physical strain, prevent sore muscles, combat brain drain, and correct poor posture. The book also provides fresh insights on reducing stress and enhancing health.

Mar

24

An alternate understanding of a market being at all time high (market reaching new prices it has never encountered) is this: "Everyone that has ever bought that stock or instrument is now in profit". What might be the psychological implications of this?

Kim Zussman comments:

It is possible (and probable) to buy, then sell after a decline and stay out only to see it reverse and go up further. This (timing) is one reason it is so much easier to do better with B/H than trading.

Big Al adds:

The other advantage to B&H is that the opportunity cost viz time/attention required is basically zero. I have looked at various index timing approaches and have not found anything that beats B&H, especially when considering the vig and opportunity cost. However, should one need to scratch the itch, timing strategies may work better with individual stocks. But again, opportunity cost.

Humbert H. writes:

I've always been believer in B&H vs. trading. But even in B&H the debate between indexing and individual stock selection never dies. I don't like indexing, but I don't have a mathematical basis for that. It's a fundamental belief that buying things without any regard to their economic value has to fail in time, at least relative to paying some attention to it.

Zubin Al Genubi adds more:

Another aspect of buy and hold that Rocky pointed out is the capital gain tax severely eats into returns. The richest guys hold for years and have only unrealized untaxable gains.

Art Cooper agrees:

There was an excellent article in the Jan 7, 2017 issue of Barron's by Leslie P. Norton on VERY long-lived closed end mutual funds which have surpassed the S&P's performance. They have all followed buy and hold strategies.

Michael Brush offers:

Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.
- Peter Lynch

Steve Ellison brings up an important point:

And yet trading is one of the focal points of this list. The way I square this circle is to keep most of my trading account in an equity index fund at all times. When I think I have an edge, I make trades using margin.

Larry Williams writes:

B&H is the keys to the kingdom, but…the massive fortunes of Livermore were short term trades despite his comment about sitting on your hands. Even the current high performers, Cohen, Dalio, Tudor etc use market timing. When I won world cup trading $10,000 to $1,100,000, it was all about timing and wild crazy money management. One approach wins big the other wins fast. A point to ponder.

Bill Rafter writes:

What we found in studying only the SPX/SPY is that in the long run a buy-and-hold yielded 9.5 percent compounded annually. That was from 1972 to recent. Our argument is that studies before 1972 are flawed. That 9.5 was great considering there were several collapses of ~50 percent. However if you could just eliminate the collapses you could raise the return to 13.5 percent compounded annually.

Eliminating the down moves did not involve prescience. You did not need to forecast recessions, only identify them when you were in one. That was not difficult, and timing was not a critical as one might think. We identified several algos that worked well.

When you were out of equities, you could either simply hold cash, or go long the 10-year ETF. The bonds were better, but not by much. Interestingly, long term holding of bond ETFs yielded low single-digit returns. Best avoided. Which also means that the Markowitz 60/40 strategy was a sub-performer.

Taxes are investor/vehicle specific. For example, if you use a no-tax vehicle, there are no taxes. Regarding turnover, there are very few transactions, as there are very few recessions. The strategy is basically B&H, but with holidays.

Asindu Drileba has concerns:

My problem with buy & hold Is that it has no risk management strategy. If you bought the S&P 500 in 1929 for example during the wrong month. It took you 25 years i.e until 1954 not even to make profit, but just to break even. The real question is, how do you know your not investing in a market path that will take 25 years just to break even?

Humbert H. responds:

That’s why, dollar cost averaging. I don’t think anyone thinks buy once in your lifetime and never interact with the stock market ever again. I think if you had averaged in monthly or quarterly from the summer 1929 through summer 1959 and then held and lived off dividends or cashed out/interest in retirement, you did well.

Art Cooper adds:

The year 1954 is almost universally given as the "break-even" year to recoup losses for buy & hold investors who bought at the 1929 peak. It's wrong to do so. First, it ignores dividends. Had dividends been re-invested the recovery year would have been much earlier. Second, it ignores the deflation which occurred during the Great Depression. In this column Mark Hulbert argues that someone who invested a lump sum at the 1929 peak would have recovered in real economic terms by late 1936.

I'm not arguing against dollar-cost averaging, merely pointing out a historical falsehood.

Hernan Avella writes:

What people should do while they are young and have human capital left is to leverage!

Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk

The most robust research, incorporating lifecycle patterns and relevant time horizons for long term investors tells us that the optimal allocation is 50/50 all equities, domestic and international. But most ppl don’t have the gumption to be 100% on equities.

Mar

13

I found this podcast episode very interesting.

Contextualization Within a Framework of Conditional Probabilities w/ Will Gogolak

As a risk officer with the Chicago Mercantile Exchange, Will Gogolak was setting margin requirements and saw a wide variety of traders’ accounts and what separated the winning traders from the losing ones, before leaving to pursue his own trading and obtaining a PHD in finance and share his knowledge of quantitative analysis and market experience with students at Carnegie Mellon University. Combining his market experience with knowledge of statistics helps William create his custom buy the dip strategy with futures and leveraged ETFs, and focusing on probabilities and determining market direction for informed trading decisions.

Peter Ringel agrees:

Love the hole series. Half of speclist was a guest.

Big Al offers:

Also very informative are these interviews with "Uncle Roy", on Top Traders Unplugged:

From 2014:
Part 1
Part 2

From 2023

Zubin Al Genubi comments:

Speaking of cognitive bias, I realize that if I feel bearish, so does everyone else. You have to go against how you feel and against the consensus.

Sam Johnson asks:

Do you need to go against the cognitive bias of how everyone FEELS or how everyone is positioning?

Zubin Al Genubi responds:

Don't most traders and their systems trade and position for that past regime? As Roy said, trend followers are all piled in at the turns and all will reverse at the same time. With the widespread use of systems everyone is doing basically the same trade. You can't get a fill after the turn as we saw last fall. You have to pre-position…be in position ahead of the enemy forces.

Mar

2

While S&P 500’s Friday [23 Feb] gain was only 0.03%, it was enough to propel it to another all-time high (13th record close this year); in years when S&P 500 did hit an all-time high, it did so 29 times on average since inception of modern version of index in 1957.
-Liz Ann Sonders

Here's #14 this year as we close up [1 Mar].

Peter Ringel asks:

How & why should one exit any equity longs [given the market advance of the last 10 years]? Not a trivial question to me.

Zubin Al Genubi responds:

Trade your system expectation time. Develop systems that can capture a trend. (Good luck with that.) (Or at least allow re entries, break outs.) Use appropriate money management and the geometric returns over time and increase net wealth. Trading in a nutshell.

Peter Ringel continues:

what if buy & hold is the best system in your arsenal - not annualized systems, but realized systems and normalized for risk? (though normalized for risk & leverage might be a debate.)

Let's say I have an uber-bullish setup: enter on 5th trading day of year and hold 5 days (not a real one). I can annualize it to compare it to other systems, but really it is just one trade, just a little slice of the year. In this case and current drift - an exit on day 5 is not justified, holding forever is.

Zubin Al Genubi sums it up:

Hard to beat buy and hold, but the drawdowns are hard to handle. Define your risk tolerance and design system around money management. As long as the system is positive it doesn't really matter how good because all returns were in the past. If you mean by "annualize" compounded annual geometric returns, that is the right way to compare systems, but also include the money management in the comparison. That is critical part many leave out.

Jeffrey Hirsch writes:

Today’s post RE ATH:

Ex-2020 S&P 500 Flatter Election Year March
But after 4 months of solid gains the market is poised for a modest pullback of maybe 3-6%.
S&P 500 Support: 4800 old ATH.

Steve Ellison comments:

A decade or so ago, I studied the 4-year presidential cycle and concluded that the pattern in annual returns had been very pronounced from 1948 to 1980. After 1980, maybe as a result of the pattern becoming widely known, later results were much more mixed and fell below statistical significance.

That said, for the past two years beginning with bearish midterm election year 2022, the major market averages have closely followed the classic presidential cycle playbook. I assume that, like the uptrend in NVDA, it will continue to work until it doesn't.

Feb

28

Fractal scaling and the aesthetics of trees

Trees in works of art have stirred emotions in viewers for millennia. Leonardo da Vinci described geometric proportions in trees to provide both guidelines for painting and insights into tree form and function. Da Vinci’s Rule of trees further implies fractal branching with a particular scaling exponent.

H. Humbert writes:

I could never understand how fractals help with markets. Yes, the world is fractal, but fractals are essentially a way to describe the "roughness" of random patterns. But is this roughness permanent? No. Are the patterns predictable? No. Yet somehow some wiggles are described as bullish and bearish fractals. Sounds like snake oil to me.

Asindu Drileba responds:

You're right! Mandelbrot himself admits that his techniques cannot predict the direction a financial instrument will move. He however says that his techniques can predict "by how much" a financial instrument will move. He describes that "large movements are more likely to be followed by large movements" and "small movements are more likely to be followed by small movements." Here is a short video of Mandelbrot describing his model.

H. Humbert replies:

Never read his books. I know Victor hated him with passion, he was one of the three most guilty, the other two were Taleb and Buffett. Watched the video, a lot of words but nothing practical. Also since his mode of thinking is simple and algorithmic, and he is famous, if there ever was anything to be gained from it, by now algorithmic trading surely made all those possible gains disappear.

Laurence Glazier comments:

There is always an element of hand-waving in attempts to make things easier than they are, and it can be seductive. Nature, however, likes economy of means, and therefore if the same-ish pattern can be used at different scales, I would expect this to happen - but this assertion itself has an element of hand-waving.

H. Humbert adds:

To me the main element of hand-waving is that coastal topography and tree branch patterns created by very different mechanisms themselves have anything to do with predicting market moves where human psychology among many things is involved.

Zubin Al Genubi writes:

There are entire financial industries and degrees relating to prediction, measurement, and trading volatility. It is one of the most important aspects of trading and protecting yourself from ruin. A simple example of the importance of understanding volatility is its mean reversion. In time of stress and price drops this is a key.

Anatomy of a Meltdown: The Risk Neutral Density for the S&P 500 in the Fall of 2008, Justin Birru and Stephen Figlewski.

September 2008 was when the crisis hit in force….On 55% of the trading days in October and November 2008, the index moved more than 3% up or down (corresponding to annualized volatility in excess of 47%). Interestingly, while it is well-known that the market tends to move faster and further on the downside, in this extraordinary period sharp moves to the upside were just as common. On the two days with the largest price changes in October, the market rose more than 10%.

H. Humbert continues:

Once again something unpredictable happened that was difficult to take advantage of. It seems like crisis-related volatility would have to subside sooner or later when the crisis is over, is this a revelation? I recall the March 2020 day when the market hit the Covid lows. I literally said to myself "this has got to be the bottom". But did I do anything? No, because I really wasn't sure. Some forces ended the crisis, but they're only obvious in retrospect.

Feb

23

There is a backlash against travel meme occurring. I don't have numbers but I'm noticing travel is down. I don't feel like traveling. My traveling friends are staying home. I saw a magazine article on why travel is bad. Boeing is down.

The Case Against Travel
It turns us into the worst version of ourselves while convincing us that we’re at our best.

H. Humbert responds:

Boeing is down because of the well publicized mechanical problems and the exposure of their general carelessness. They're not affected a great deal by the minute-to-minute variations in travel demand due to long lead times and large backlog.

Pamela Van Giessen writes:

The Davos crowd has been pushing no travel because climate change. Except for their private jets to exclusive Swiss resorts.

Air fare to AZ is high for Feb-April and Scottsdale airbnbs are pricey so I’m not sure if travel is really down except to MT because no snow for skiing. A friend reports that Park City was busy for Sundance. Besides, don’t most people travel a bit later during spring break when the kiddos are out of school? And could it be they are booking their travel for when they can drive and avoid airport unpleasantness?

Word is that Coachella sales are slow but Stagecoach which takes place a week later sold out super fast. Seems like Coachella is flagging on the booked acts, not a lack of travel interest (given that Stagecoach is basically down the road). Charley Crockett tickets for the middle of nowhere Emigrant MT sold out in about 20 mins for June. Maybe it’s all local but I suspect a fair number of tickets were bought by out of towners.

H. Humbert observes:

I was in Napa Valley recently for somebody’s birthday and everything was sold out but the winery. Some people needed to find last minute hotel reservations, was almost impossible. The restaurant where you eat in a yurt had no empty yurts, in torrential rain. Not considered the best time of the year to visit it either because it does tend to get rainy.

Henry Gifford comments:

10 or 20 years ago Boeing moved their corporate headquarters to Chicago for the stated purpose that they wanted to be taken seriously by Wall Street. Headquarters >1,000 miles from the nearest factory? Insane. The place was run by engineers, which is smart for a company manufacturing complex things. Now I think they are run by accountants and lawyers - see how Detroit has been making out with that strategy.

The problems a few years ago with planes diving unexpectedly were caused by the MCAS system: Maneuvering Characteristics Augmentation System - an acronym giving little indication about what it is or does. The system took an input from one angle-of-attack sensor on the nose - a fin whose position changes with the angle of the wind passing over the nose of the plane - and if it saw the nose was too high (could lead to a stall: chaotic airflow over the wings causing a loss of lift), it automatically pointed the nose of the plane down. This broke the rule in aviation design that the failure of one mechanical device (the angle-of-attack sensor) should not lead to a crash. Bad sensor readings caused the sensor to push the nose down when the plane was actually flying fine - two planes nosed down into the ground, killing hundreds of people. A better design strategy is to require simultaneous failure of two mechanical devices to cause a crash. In other words, the computer should have been wired to two sensors. The crazy thing was that the computer was wired to two sensors; each plane had two, or optionally three. If the software received contradictory signals, a red light should have alerted the pilots and disconnected the "ANDS" (automatic-nose-down-system (my name), and if the plane was on the ground, it should not take off until the sensor(s) work. Basic engineering 101.

The company might do well with government contracts, automatic market share, etc. But it will be decades before the young and ambitious will be proud to work there.

Bo Keely relates:

A new Slabber just retired here from Continental Air. He insists that Continental for years has been tied to the CIA, and that he too was that. With a Masters in Electronics, he is also the person the President called to deflect missals gone astray. The technique is to send two jets after the launch to intercept the wrong destination. The most recent example was one shot from a submarine off Hawaii aimed for a Utah test target, that misguided toward LA. That would have been a horrendous traffic jam. The first jet, slower that the missile, intercepts its trajectory to radio the bearing to a second jet to close in to electronically knock the missile off-course. It landed outside San Bernardino to cause a forest fire that the military blamed on careless campers. Other scapegoats have been UFOs, but they've been US missiles.

Humbert H. is skeptical:

Distance from Hawaii to Utah is about 3000 miles. So slow moving cruise missiles can be ruled out. For either ICBM or IRBM, depending on the phases of the trajectory, the speeds can vary. These vehicles' speeds after the boost phases range from Mach 18 to 25. Mach 1 is 767 miles per hour. A typical passenger jet can reach no more than 600 miles per hour. There are many things about the fictional story of the ex pilot just simply don't add up.

Feb

5

Kim Zussman offers:

Meet the Investors Trying Quantitative Trading at Home

Pietros Maneos trades stocks like many of Wall Street’s most sophisticated operations: running dozens of computer-driven strategies in parallel to chase market-beating returns. But he isn’t some tech-savvy math type. He is a published poet who doesn’t know how to code. Maneos, 44 years old, uses online-trading platform Composer.trade to build, test and bet on quantitative trading algorithms that buy and sell stocks and exchange-traded funds out of his home office in Boca Raton, Fla. One algorithm, for example, holds a triple-leveraged exchange-traded fund tracking the Nasdaq-100 index if the S&P 500 index has recently trended higher—and Treasury bills otherwise. He is currently running 72 such schemes he constructed with the application’s graphical interface, but can also type requests in plain English that Composer’s AI will translate into code. “It’s like having my own personal black box,” he said. “You could argue that I’m a hedge fund with 72 strategies.”

Big Al is puzzled by this bit from the above:

Many users praise its simplicity. But several warned about the tax implications of wash sales and the absence of some common Wall Street risk-management tools, such as one that would automatically exit a strategy when a specified loss is reached.

Huh?

Zubin Al Genubi wonders about market microstructure:

On CME is not clear. Is there somewhere how price changes is explained? Seems the asks should go to 0 before price clicks up but they don't. There is a lot of juggling in the queue as well, spoofing, stuffing. I'm reading Flash Crash, by Liam Vaughan.

Jeff Watson responds:

Here is an excellent perspective on spoofing.

Big Al adds:

This book gets recommended a lot but I haven't read it. Pubbed in 2002.

Trading and Exchanges: Market Microstructure for Practitioners, by Larry Harris.

Asindu Drileba recommends:

I am currently enjoying this biography of Jessie Livermore by Patrick Boyle. It's so well narrated, I hope some of you enjoy it.

Henry Gifford observes:

Patrick Boyle says he used to work for Vic.

Feb

4

Under the central limit theorem, the distribution of sample means approximates a normal distribution as the sample size gets larger, regardless of the population's distribution. For a Gaussian distribution a sample size of 30 is fine. For Student T distribution with 3 degrees of freedom, which many of us use, with fatter tails, convergence under CLT requires a sample of at least 130! This would leave only some very broad trade criteria for a robust confidence level.

William Huggins responds:

that sample size is only required is you want to make confidence intervals based on the normal distribution (which requires convergence) but you can make confidence interval from almost any sample size and certainly with any distribution. the difference is that smaller sample T's produce large standard errors (due to fatter tails).

Theodosis Athanasiadis comments:

i believe one should approach testing and risk management differently. for back-testing you care more about the mean of the distribution so you should use either a bootstrap (as William mentioned) or even shrink the outliers using some robust statistic. for risk management/stops you should definitely use fatter tails.

Jan

26

Daily sd's 1 (1,1,1,1,1,0,0) mean variation .71 PL 2
Daily sd's 2 (0,0,0,0,0,0,5) mean variation .71 PL -18
Correct forecast, but went bust anyway, due to lumping of volatility.

Asindu Drileba asks:

What would be the best strategy to capture the return of this distribution? How would the position size be computed? Say you have $10.

Zubin Al Genubi replies:

OTM option? Don't know which direction so maybe a strangle? Its an example of a fat tail event surprising someone expecting a certain variance. Like the LTCM guys. $.20? 2%? As a hedge. Depends if its hedge or a trade.

William Huggins comments:

what you're picking up on is that variance alone doesn't describe non-normal distributions very well - you need additional tools like skewness (possibly kurtosis) to pick up on those differences. despite having a better description though, there is the presumption that the data generating process is stable across the sample period, and going forward. I've generally found (despite my poor timing record) that money is to be made when the distribution is changing, not stable (the computers rule those waves imo) so detecting breaks may be more valuable than fixed descriptions.

Peter Ringel writes:

I can confirm this from the math-undereducated trading side. Stability is boring, and boredom can lead to undisciplined trades. Shocks and short-term exaggerations are great.

Art Cooper points out:

Stability is boring, and boredom can lead to undisciplined trades. It's Minsky's Theory when this becomes widespread.

Zubin Al Genubi responds:

Thank you Dr Huggins. That is indeed the point that variance, regression, sd, means, should be used with power law distributions with extreme caution or not at all.

Hernan Avella questions:

Why is all that mumbo necessary when all you need is good entries and good stops? The house never closes and there are so many opportunities ahead. f you need that big of a stop, or it gets triggered so frequent that ruins the profits, your system sucks! It’s not a stop-loss problem.

H. Humbert comments:

I think he is saying the system did suck because it relied on improper statistical analysis, using gaussian distributions for prediction when it should have used a more sophisticated statistical analysis that doesn't make such assumption. If you know of good entries reliably without using statistics, more power to you! And maybe he needs volatility swaps in addition to variance swaps and then his system will be A-OK because that could be a simple way to hedge the fat tails. Since I don't trade, I'm just trying to interpret what's flying by.

Humbert H. writes:

Var swap vs. vol swap would be the purest expression. You could also buy a call on realized variance, by buying an uncapped variance swap and selling a capped variance swap (for historical reasons, the cap is struck at 2.5x the variance swap strike, the cap level acting as your effective call strike).

For 100k vega notional and uncapped strike at 22, and capped strike at 20, and realized vol over the period of 80:

100,000/(2*strike) = var notional = 2,272.72 var units uncapped, 2500 var units capped
Pnl uncapped 13.4mm
Pnl capped -4.1mm
Net 9.3mm for ~0.2m cost, not bad (approx (22-20) * vega not).

Some payouts were on the order of 2000:1 during March 2020. Pre 2020 you had some active sellers:

‘Amateurish’ Trades Blew Up AIMCo’s Volatility Program, Experts Say

H. Humbert responds:

Interesting. And an interesting article. You'd think that after LTCM people would realize that 100 year floods are just named that for convenience. That's why I never buy stocks in insurance companies. He whose name shouldn't be mentioned (not the fractalist but the Middle Eastern guy) always advocated buying black swan options, but I think the Chair didn't think he made money on this.

Kim Zussman links:

The hedge fund titan who’s been watching for ‘black swans’ for decades says the ‘greatest credit bubble in human history’ is set to pop—but he’s not worried

Jan

26

two excellent books with direct applications to markets:

Regression: Linear Models in Statistics, by Bingham and Fry.

Event History Analysis: Statistical theory and Application in the Social Sciences, by Blossfeld, Hamerle, and Mayer.

both highlly recommended

Zubin Al Genubi adds:

Previously recommended by Vic:

Event History and Survival Analysis: Regression for Longitudinal Event Data

I've used survival statistics for studying survival time between crashes, x-day highs/lows, ATH, bear markets. Poisson distributions are the distribution for time occurrences as well.

Big Al offers:

Free online book using R language:

Statistical Modeling: Regression, Survival Analysis, and Time Series Analysis, by Lawrence Leemis, William & Mary.

Vic's twitter feed

Jan

25

People have said that the reason fundamental physics has slowed down is that we have picked all the lower-hanging fruit, but that's not true. There is more lower-hanging fruit than ever before, it's just that picking it is stigmatized.

- David Deutsch

The full podcast is here.

This reminds me of what Brian Arthur insinuated in his book, The Nature of Technology. Brian Arthur describes technology as a combination of other technologies. An example is smart phone being a combination of battery technology, wireless communication technology, a microprocessor technology etc. A common statement I hear often is that we will not see much more technological progress because all the lower hanging fruit (or important things to be invented) are gone. Brian Arthur in his book asserts that if technology is a combination of other technologies, then the invention of new technology should increase the possible space of new technologies that can be invented. For example an AI breakthrough (the invention of the Transformers Model that underlies ChatGPT) will make it easier to invent new products, discover new phenomena which will also make it easier to produce even newer technology. Could this insight be a a good conjecture for always being long technology companies, since we expected technology to grow almost boundlessly if this is true?

Peter Saint-Andre comments:

Although it's seemingly true that technology always grows, that doesn't necessarily mean that technology companies are always a good investment. Various technology industries (crypto, Internet, semiconductors, chemicals, automobiles, radio, railroads, etc.) have experienced cycles of over-investment and hype. I worked in Internet tech companies from 1996 through 2022, and plenty of the companies I worked at either went bust (returning nothing to the investors or employee stockholders) or never approached their former highs (can you say Cisco?). It's not clear to me that, on balance, technology companies provide above average returns. But my perspective is qualitative, not quantitative.

Zubin Al Genubi responds:

That is the Lucretius Fallacy. Thinking the prior highest or best is the top. There will always be something new, bigger, better. That is why NQ is good over time. The old fades out and the new rises ever higher.

Asindu Drileba replies:

It is true that most tech companies actually fail without ever yielding a profit. How ever if your are diversified i.e have a very broad portfolio of investments. You don't have to be successful very many times. You can do very well with a 90% failure rate. Fred Wilson (of Union Square Ventures) claims that half of all VCs beat "The Stock Market" (I am assuming he means the S&P 500).

Big Al writes:

Important, too, to notice the improvements in ordinary things we might otherwise take for granted. A lot of this progress happens in basic materials. A quick search produces:

9 Material Discoveries that Could Transform Manufacturing

During Covid, our dishwasher broke. It was at least 35 years old and possibly older (amazing the use we got from it!). Because seemingly everybody was remodeling while they were stuck at home, it took us 3 months to get a new Bosch (during which time I washed a *lot* of dishes). But I was amazed at what an improvement the new Bosch machine was: it's so much more efficient, with energy and water, and effective, as well as quiet and very smart. That experience woke me up a bit to how much things get improved, and without any central planning authority being responsible for it.

Hernan Avella warns:

Yet, the new Bosch won't last 1/2 of the old one.

Jan

22

This is the best explanation I have seen so far concerning the Poisson Process & Poisson Distribution. It has clearly defined math variables (something explanations involving maths seldom do) & very clear practical examples. I wish more people describing math concepts wrote like this.

A Poisson process is a model for a series of discrete events where the average time between events is known, but the exact timing of events is random. The arrival of an event is independent of the event before (waiting time between events is memoryless).

Zubin Al Genubi comments:

Seems useful to study occurrences of crash or bear market.

Big Al offers:

3Blue1Brown does some great math videos, eg:

Binomial distributions | Probabilities of probabilities, part 1

H. Humbert is skeptical:

It's hard to know without a lot of study whether this is useful for any real-world applications. This distribution has been used in network traffic modeling since the advent of networks because networks have packets and packets have rates that COULD be pretty stable over the period of interest. It worked pretty well for legacy telephone networks, but not so much as computer networks become more and more complex. People still like it because it's a relatively simple formula where if you know the lambda you know everything, and it has no memory of the past so you don't need to store the past, but it doesn't really work well. It doesn't even work that well for predicting meteor showers because the rate itself is subject to change, so can it really work well as a predictive tool for the markets?

Andrew Moe writes:

Poisson has shown to be useful in predicting soccer and hockey scores. In the markets, one test might be to model uncorrelated markets against each other in a double Poisson, like the soccer quants do. Offense and defense, up markets and down.

Jan

19

Interesting in many ways:

James Simons (full length interview) - Numberphile

He worked a lot on differential geometry which would seem to be the area of Ralph Vince's manifolds.

Zubin Al Genubi writes:

Differential geometry would be good for Ralph Vince's optimal f portfolio calculation finding the peak "hump" in the multidimensional surface. Can anyone recommend a good entry level book?

Big Al offers:

Possible: The Leverage Space Trading Model: Reconciling Portfolio Management Strategies and Economic Theory by Ralph Vince.

Also a list of Ralph's publications.

Zubin Al Genubi comments:

An interesting aspect of Vince's optimal f calc for a portfolio is that it solved by iteration. The idea of iteration is interesting in finding optimal values in functions. Also, graphing is an important tool to find maxima, and inflection points in curved functions.

Big Al adds:

Newton's method in optimization

Jan

17

Statistical Consequences of Fat Tails

Taleb discusses how fat tails can affect probabilities. Is a 10 sigma event an outlier or is it part of a different power law distribution. How slowly does the Central limit theorem conform say Student T distribution to normal (need n>120) for proper confidence levels. Learned about Pareto and other power law distributions. Book suffered from poor editing, missing color references, and Taleb's abrasive pedantics. Recommended nonetheless.

Asindu Drileba writes:

I have learned a lot from both Vic & Taleb. Vic introduced me to obscure trading psychology & insights. Via his books, interviews and books recommended (Horse Trading, Secrets of Professional Turf Betting etc). At first these recommendations seemed strange. But after watching this video by D. E Shaw, it finally made sense because Shaw hints that successful models are built often via thinking in terms of analogies. So, reading Vic's own books, book reccomdations and thinking in terms of analogies can allow you to develop new insights into the market.

Taleb introduced me to the complexity theorists (Didier Sornette, Ole Peters, Mandelbrot etc). He also actually introduced me to Vic's work. Education of a Speculator is praised & highly recommend in Taleb's Fooled by Randomness. I also like Taleb, because he simplifies his concepts in to plain English. So a lay man like me can easily understand what he is trying to say. For instance majority of a statistical consequences of fat tails is summarized in Extreme events and how to live with them- The Darwin College Lecture. In plain English.

Zubin Al Genubi reponds:

The gist of the papers is that use of Gaussian underestimates tail events. Its a good point. Since so many do, it opens good trading opportunity. I've found several which is left as an exercise for the reader and explained in the references here.

Jan

16

One main assumption in statistics is that samples are independent and not correlated. However, it seems apparent to almost every trader that the outcome for one day is related to yesterdays price action.

Andrew McCauley writes:

Your comments reminded me of something that Benoit Mandelbrot mentioned in his book The (Mis)Behavior of Markets: A Fractal View of Financial Turbulence:

Speaking mathematically, markets can exhibit dependence without correlation. The key to this paradox lies in the distinction between the size and the direction of price changes. Suppose that the direction is uncorrelated with the past: The fact that prices fell yesterday does not make them more likely to fall today. It remains possible for the absolute changes to be dependent: A 10 percent fall yesterday may well increase the odds of another 10 percent move today—but provide no advance way of telling whether it will be up or down. If so, the correlation vanishes, in spite of the strong dependence. Large price changes tend to be followed by more large changes, positive or negative. Small changes tend to be followed by more small changes. Volatility clusters.

Big Al offers:

Just felt like doing some tinkering, so here is a chart with two series: The upper series is the moving 20-day C-C % return of SPY adj, calibrated by the right hand axis. The lower series (left hand axis) is the 20-day rolling sum of the absolute value of the daily % changes. As expected, the lower, vol series tends to peak when the upper series is spiking downward, but the chart could provide some interesting trailheads for further research.

Jan

14

I have an interest in prediction markets (also known as information markets or idea futures), such as election betting odds, that allows people to place bets on who they think will be the next president. I wrote an article on my blog some time back (2020) describing the phenomena referred to as the "wisdom of the crowds" that makes these prediction markets possible:

For years now I have been fascinated by prediction markets. The source of excitement is the idea is that you can use financial markets to do inference — just like machine learning. A famous example of such prediction markets are the orange futures. The orange futures market is one that allows entities to buy oranges in advance. How it works, is that one can pay $1,000 to receive 1,000 oranges that will be delivered next year. An interesting side effect of this orange futures market is how it accurately predicts temperatures in certain locations more specifically, the temperature of the locations where the oranges are from.

Peter Ringel writes:

this is a clever thought, and also a terrible situation. I too noticed that it seems - in places - to be easier to predict pockets of the real economy with the financial markets. Of course, traders like it the other way around. Mkts got so efficient. The outside world has way more inefficiency left. (Also enjoyed your mention of "J" language - never heard about it before.) the source of excitement is the idea is that you can use financial markets to do inference.

Zubin Al Genubi comments:

The difference between prediction markets and financial markets is that prediction markets are binary outcomes and markets have non binary outcomes. The distributions are different.

Larry Williams responds:

What a great point. That’s a massive difference….then add in position size.

H. Humbert writes:

An option price seems awfully similar to a prediction market price: both deal with a discrete event at a particular time in the future (or at least close enough for most prediction markets), and right before expiration both, in a way, create a binary choice. I don't trade options, but that's what it appears like.

Zubin Al Genubi replies:

One big difference is options are subject to arbitrage. The prediction markets are not and get wildly inaccurate swings.

Big Al offers:

Binary Option
Superforecasting: The Art and Science of Prediction
Brier scores

From an interview with Michael Mauboussin:

…when you have an investment thesis to buy or sell something, that means you believe you're going to generate an excess return, or there's a mispricing in the market. And…that thesis should have sub-components to it that will allow us to create a scoring system. The most common of these or known of these is called a Brier Score….To have a Brier score you only need three things. You need an outcome that we can agree upon, within a time period that we are finite, with some probability….And so my argument is break down your thesis and put it into some Brier score ready predictions…what I find is the very discipline of writing those things down will force you or compel you to think more…deeply about them. For example, if you're assigning probabilities, you're going to immediately start searching for base rates.

Jan

10

Mises Stationarity Index

Buy S&P when MS in lowest quartile. Hold bonds in highest quartile. Beats S&P buy hold by 2%. Per Spitznagel.

James Goldcamp responds:

Is the quartile a rolling or calculated over the entire history, a fixed lookback, etc? (I have this book I think somewhere I guess I could find it myself). The graph would suggest, if using "max quartiles", it stays a buy or hold (bonds) for long periods. I feel like that would also generate many flat periods if you are in bonds in the highest and wait until it drops to lowest to get back into the market.

My interpretation could be totally wrong (above) , so apologies if I'm grossly misrepresenting, but I've always been nervous with very long term timing mechanisms because you may miss good investing years before you know the model is flawed. Of course you might say the same for "long only" domestic investors in Japan investing in the 80s. But it's always nice when flawed ideas fail fast non-catastrophically.

This does bring up fond memories of watching a presentation of various long term timing models of the late Nelson Freeburg in Orlando in 1998 (I think) - I believe one was called "Competitive Returns" that compared equities and bonds and may have been originally attributable to Ned Davis. He reviewed several that day (one may have been a Zweig timing mechanism). I always liked Nelson's newsletter which he graciously sent to our office for many years.

Big Al offers:

The Single Greatest Predictor of Future Stock Market Returns

And the current version on FRED.

Jan

9

John Floyd on the Biggest Trades and Risks for 2024

Peter Ringel writes:

regarding the other topic on win rate: In this interview, John too mentioned (as an FX macro trend trader) a win rate below 50%. "I am more wrong than right." Of course, this gets rectified by larger wins than losses and the resulting expectancy.

Zubin Al Genubi adds:

My biggest take aways were that volatility will be higher next year and Japan will do better than it has been.

Jan

9

Option Volatility and Pricing: Advanced Trading Strategies and Techniques, Sheldon by Natenberg. Recommended in by Ralph Vince.

The Dao of Capital: Austrian Investing in a Distorted World, by Mark Spitznagel and Ron Paul.

This is a magnificent, scintillating book that I will read over and over again. It provides a theoretic and practical framework for understanding the insights of all the greats that a student of markets will encounter—Soros, Baldwin, Klipp, Buffett, Cooperman (albeit these greats might not realize or acknowledge it). It teaches you things about war, trees, martial arts, opera, baseball, board games. Every page is eye-opening, with numerous areas for testing and profits in every chapter. I will share the book with all my traders, friends, and circles of influence. Here’s an unqualified, total, heartfelt recommendation, which coming from me is a rarity, and possibly unique.

- Victor Niederhoffer (from inside cover)

Quite exciting tale of 1939 failed Russian invasion of Finland:

A Frozen Hell: The Russo-Finnish Winter War of 1939-1940

And a classic from Ralph Vince:

The Mathematics of Money Management: Risk Analysis Techniques for Traders

Martin Lindkvist writes:

Many years ago in 2006 I had a heated discussion on this list with Stefan J about the Finnish winter war as well as WW2 and what conclusions could be drawn from them about Sweden's position. Suffice to say that we both thought we won and still left the argument amicably.

There is a very good film from 2017 as well as a Netflix series about the "Continuation War" called Tuntematon Sotilas/Unknown Soldier. This war was from 1941-1944 and started after Germany used Finnish territory for part of Operation Barbarossa, and as the Soviets started to bomb Finland, they seized the opportunity to try to take back lost territory from the Winter war.

Stefan Jovanovich replies:

Martin won. He was then, as now, gracious to a fault. These links provide some background:

Carl August Ehrensvärd

Ernst Linder

Swedish Volunteer Corps

[Also of interest: The Winter War (Talvisota) DVD - Uncut (70 min. longer than U.S release) -Ed.]

Jan

7

Consider using Mean Absolute Deviation, arithmetic Average of absolute returns, in lieu of standard deviation. This is often done in finance unintentionally. Cant remember which understates variance. Easier to compute.

William Huggins writes:

The problem with MAD in finance is that it is not continuously differentiable, making it hard to include in optimization calculations. Also, variances are additive but MSDs are not (handy for portfolio math). (A student asked me this question last semester and I had to spend some time sorting out the answer for him. As a single stock measure of dispersion, it's fine but its hell in portfolio math.)

Peter Ringel asks:

Isn't MAD or better MAD/median ratio a good non-parametric metric? I use it for range & volatility comparison over different timeframes. I don't trust Stdev in markets. (my ignorance will be exposed very quickly here - Just trying to apply, what I learn from list and it's members.)

William Huggins responds:

it's totally fine for one-to-one comparisons but can't be used to find out what the MAD of a portfolio of two stocks would be without redoing all the math. for stdev, you square it up to variance, add them, then root back to stdev. optimization of portfolios relies on calculus to find the weights that result in minimum variance but you can't differentiate MAD in the same way. so it can be used for a side-by-side comparison, but MADs don't play well when you mix them. (strictly speaking, what I wrote is good for independent stocks - if they are correlated, and they all are - you need to account for their covariance. there is no co-MAD to include in equivalent calculations.)

Bill Egan comments:

One outlier is sufficient to distort the mean and thus the std. Median absolute deviation (MAD) avoids this, being resistant to up to 50% outliers (which ought not happen in price data).

Robust Standard deviation = 1.4826*MAD

Huggins is correct - derivative based optimization methods blow up when you use MAD or similar methods. Simplex or genetic algorithms work for optimization in that case. For estimated covariance, you can try replacing mean with median in the covariance formula.

William Huggins adds:

I last applied MAD, while I was trying to understand better, why markets ( NQ, Spoo) are so absurdly homogeneous with their ranges for different intraday time-frames. And if some time-frames are less efficient than others. And I believe some are. During the last summer market it was very noticeable.

Jan

7

Height, weight, are distributed normally. Once an infinite variable like wealth is introduced, the distribution is no longer normal and can't be regressed. Lots of implications including convexity here.

Past extremes are not good predictors of future extremes. (The Lucretius Fallacy) Simple proof is that the last biggest was bigger than the one before.

Nils Poertner writes:

markets sometimes go from one extreme to another, they tend to overshoot like a novice at the sailing boat - always over-steering the boat. great for us as trader/investor.

William Huggins comments:

They can be regressed but only after an appropriate transform (log, ln, etc). The key is transform in reverse before interpreting outcomes.

If the data is time series though, you'll find that exponential growth (organic) results in "exploding variance' that makes the coefficient estimates less reliable (larger standard errors). Feasible generalized least squares maybe more practical than OLS in such cases.

Zubin Al Genubi responds:

A transform is the standard work around but you can't transform an infinite variable into CLT compliance without losing so much important information to make it dangerous. Its a different distribution. That's my point.

Jan

1

A main goal of the spec list is discrediting ballyhoo: Many so-called quant this quant that show the arithmetic capital appreciation and a fixed bet creating an artificially inaccurate accumulation. Some show the max loss, but due to volatility drag (33% needed to recover 25% drawdown) the growth will not be as their charts show. Instead of $100,000 bet every trade, after a 25% loss the fund is under water.

On the upside geometric returns will rapidly outpace the arithmetic returns due to compounding rather than a fixed trade amount but they don't use that either. So the quant charts twitter charts are wrong in 2 of the most important aspects.

Larry Williams:

What I have come to believe and practice that in money management is all that matters is the trade I’m in right now. The past numbers of the strategy have no bearing on what I will do. Why? Its like a gunfight —you will kill or killed. The trade I am in now will lose or win. There are no other options. That is the hard reality I deal with and protect myself accordingly.

Jeff Watson agrees:

Bingo!

H. Humbert asks:

So are you all saying you literally have to create a new strategy or a version of the old strategy from scratch in every single trade, without regard for the past. This can't be right, can it?

Larry Williams replies:

Oh no, not at all each trade offers the same odds of winning, 50/50, so ‘bet’ accordingly.

Dec

19

How does the arithmetic average differ from the geometric average in measuring returns?

The arithmetic average calculates the average gain per trade without accounting for the compounding effect. On the other hand, the geometric average (CAGR) considers the actual compounding from start to finish, providing a more accurate measure of the actual return.

Can positive arithmetic averages lead to losses or ruin in trading?

Yes, even with a positive expected arithmetic average, losses or ruin are possible due to the risk of ruin and the increased burden in recovering from drawdowns, . Geometric averages, considering drawdowns and compounding, offer a more realistic view of potential outcomes.

From quantified strategies.

This is the path dependency issue. Conclusion is position sizing is important to avoid risk of ruin or catastrophic drawdown.

Bill Rafter responds:

You are almost there. Think: can these two means be used to identify anything else?

Kora Reddy adds:

also called volatility drag:
vol_drag = mean(x) - exp(mean(log(x)))
or an approximated formula
Volatility Drag = -0.5* (Volatility)^2
PFA useful leteratrue

Zubin Al Genubi replies:

The expectation and the maximum drawdown can be used to compute optimum f, the fixed fraction of capital to risk on each trade.

I read the article [on volatility drag] and disagree with it. Ralph Vince says that a system will experience drawdowns equal to f and that is the only way to the highest compounding resulting return. It is impossible to get the return without the volatility. Diversifying systems can counter balance drawdowns if truly uncorrelated.

It is non-ergodicity of trading markets that make the geometric mean more important. A loss is not a straight line down, but convex because it takes a 100% gain to recoup a 50% loss. The geometric mean captures this. Arithmetic mean does not.

Big Al offers:

Shannon's Demon, or rebalancing between uncorrelated assets (they claim it's "little known", but that is doubtful).

Kim Zussman contextualizes:

"Say, your fund is down almost every year. What value do you add?"

"We're uncorrelated! (with buy and hold)."

Dec

19

Most people search or try optimize for highest system return. It is not the most profitable over time. The amount of profit over time is determined by the money management you apply to the system more than by the system itself. This is mind boggling to me.

- James Sogi

H. Humbert counters:

In one of the many money manager podcasts I listen to, one of them used this very assertion as an example of, shall we say politely, a less than optimal belief. But he used stronger language.

Peter Ringel writes:

It is still important to aim for a good naked system (without position sizing applied). The risk/drawdown vs overall return relation comes from the position sizing applied world. A better core system makes more aggressive position sizing possible.

Zubin Al Genubi replies:

A better core system makes more aggressive position sizing possible.

Disagree. According to Ralph Vince bets in excess of optimal f results in lower overall system returns due to larger drawdowns with larger size! Comparing core systems should be by geometric mean, not necessarily w/l, %win, t score, etc. Interestingly Sptiznagel says something very similar. There is something very important going on here that is being missed.

Gyve Bones comments:

Depending on the breaks of course, there is no money management system method that can turn a no-edge “loser” naked trading system into a winner apart from lucky breaks. But a winner with a naked edge can be ruinous with over-sized bets, or smothered by various vig drags if the bets are under-sized. As one guy put it in this article from 2000, the key is to find the sweet spot in between.

But as Ralph has shown, the sweet spot, the “optimal-ƒ”, means that the better the system, the higher the ƒ value, on a scale of 0.0 to 1.0 means that if the largest losing trade used in the sample ever re-occurs, your stake will have a single-trade drawdown equal to ƒ%. That is, if the optimal–ƒ is 0.65, and then you have a re-occurrence of the worst trade from the history of the system, you will have a 65% drawdown of the portfolio. But trading at ƒ is the only way to make sure you’re not over betting or under-betting in order to maximize the potential gains of the trading system, if you accept the premise that the series of trades you feed into the optimal-ƒ algorithm is a reasonable and realistic representative of the trade returns going forward trading that system.

Larry Williams has a definite view:

BETTER CORE SYSTEM ETC IS MEANINGLESS. The past is never the future and it takes only one trade to put a bullet through your skull when you mess up. Past ’good numbers’ from a trading strategy are meaningless.

Peter Ringel responds:

but even the Kamikaze-trader dialed it up to 11 to win championships in a stellar way and endured brutal drawdowns. and the final win, of course, impossible without an underlying strategy.

Larry Williams replies:

Kamikaze man was clueless, mindless and fearless as well as blessed with luck and Mr Vince to plug holes in the dyke.

Zubin Al Genubi gets statistical:

A benefit of using parametric techniques is that empirical data isn't required and we can do what if's as conditions change.

James Goldcamp writes:

When coming up with a position size rule it must be as with the system itself subjected to in and out of sample testing. We used to have a program circa 1998 that would calculate the optimal ("f") amount of capital over first X trades then apply to the rest of history using the optimal method. This led to hypothetical out of sample blow up not infrequently due to the instability of model returns (even for models that were to some degree still profitable on blind data).

My subjective belief is that most edges (perhaps other than those derived for market making ultra, frequent, or arbitrage/structural type trades) are way too unstable to try to extract anything approaching a past optimal bet size. It seems like the 3 questions or dimensions that one deals with are will it still work at all in future, if it does how much will it vary from the past (expectation and path), and how will the aforementioned two work in relation to other methods you have that work. The last point relates to in my observation the most common form of risk management, multiple bets with negative or low correlation, that's perceived to be a better way of managing risk than dialing leverage of any particular return stream. Any of the aspects are subject to the ever changing cycles.

Big Al adds:

Often the tricky part is finding uncorrelated assets that are reasonable trades or investments.

James Goldcamp responds:

I agree totally. For me it's the 3rd uncontrollable variable - if the ideas work, how well they repeat (robustness I guess), and how they continue to relate to other things. Hypothetical modeling of complex portfolios often assumes all of these properties will continue. There are lots of ways for a leg on your table to collapse!

H. Humbert comments:

Since the number of unknown important variables in complex real-world problems as opposed to simple games of chance of even poker can never be fully known, and the influence of even known variables, by themselves and in combination, can only be examined via past data and in no controlled experiments, it seems like any system can experience a catastrophic failure and/or change in being amenable to any strategy at any time. I admire traders who brave these unknowns and prefer to rely on drift that seems to be more robust and stopped only by major wars and revolutions.

Dec

18

TLT was way down since we discussed it at the end of August. Interestingly, HYG down nowhere near as much and still ahead of TLT YTD. My intuition would *not* be to see a narrowing of the spread between UST and HY.

Zubin Al Genubi responds:

Bonds have positive convexity, and will experience larger and larger price increases as the yield falls.

Alex Castaldo explains:

I am disappointed that the major ETF web sites (etfdb.com, etf.com, etc.) don't seem to give Duration values for Bond ETFs in a reliable and consistent way (sometimes they have it sometimes they don't). With a little effort I was able to find the following on 2 different sites:

TLT Portfolio Data
DURATION 16.11
YIELD TO MATURITY 5.19%

HYG Portfolio Characteristics
Average Yield to Maturity as of Dec 15, 2023 7.64%
Effective Duration as of Dec 15, 2023 3.37 yrs

Assuming these are both correct, up to date, etc. we can see that the Duration (responsiveness of price to yield change) of TLT is about 4.7 times that of HYG. And this is quite common when comparing high yield and high rating bonds (or bond funds).

Zubin Al Genubi adds:

Convexity, along with duration explains bank issues with rapid yield changes, and TLTs rise this month.

Dec

18

Edison believed that the human mind solves problems best just after a person wakes up from sleep. When he was working on a difficult problem, he would nap in his office armchair and hold a steel ball in his hand. When he would start to fall asleep, his arm muscles would relax and the ball would drop from his hands and land on the floor. This would wake him up and he would find that he had the solution to his problem.

Salvador Dalí, the painter, also believed that interrupting the onset of sleep could make him more creative, and he held a heavy key rather than a metal ball.

Now, more than 100 years later, a scientific study has shown that people can solve problems better just after they awake from a nap as long as they wake before they fall into deep sleep (Science Advances, Dec 8, 2021;7(50)).

Edison was right: Waking up right after drifting off to sleep can boost creativity

Zubin Al Genubi suggests:

Why We Sleep: Unlocking the Power of Sleep and Dreams, Matthew Walker. Great book. Lack of good sleep is really bad.

Hernan Avella warns:

Matthew Walker book is ok in spirit, we all know sleep is good. I'm an athlete and try to get 9-10hrs, but on closer inspection, the book is full of omissions, misinterpretations and overstatements. See: Matthew Walker's "Why We Sleep" Is Riddled with Scientific and Factual Errors.

Nils Poertner writes:

when waking up during the nite more than once, it may be my position that I kept overnite. and during Asian times, mkts turned and I got wrong footed and next day will be brutal too. could be something else of course too but I give it some reflection when it happens. like Elias Canetti says: "All the things one has forgotten scream for help in dreams."

Easan Katir adds:

Not that I've solved any problem as great as Edison providing electric light for the world, yet I've found that pre dawn time between first waking and getting up best for solving business and life issues. I write down the solution so I don't forget amidst the daily cacophony of market news.

Dec

13

With a positive expectation (actually doesn't matter how great) increasing N and or decreasing dispersion of returns of trades will increase terminal net wealth in direct proportion! If you understand this you can succeed in trading. Each variable is a leg on a right triangle solvable by the Pythagorean equation!

- James Sogi

Decreasing stop loss to reduce sd will reduce N and may reduce overall return.

Jeff Watson writes:

I only use mental stops, and strive for 100% personal compliance when pulling the trigger to get out. My rationale is that any stops on an exchange or broker server…or in a broker’s deck, become part of the market. That’s too much information to give to the market.

Peter Ringel comments:

yes, quite a few studies show, that stops degrade systems. mental stops but with technical alert levels seem useful. fight for exit - fight for entry. catastrophic hard stop still makes sense.

Larry Williams advises:

Not having a stop has been the death of more traders than having stops.

Humbert H. writes:

To me a "stop" is a trading concept, not an investing concept. It's almost devoid of meaning if you're an investor. Traders operate on price movements, investors operate on price vs. value. Just the way I understand it from observing the lingo in the two "camps", and what it means to be one vs. the other. Of course if you're an investor and there is a huge unexpected price movement, you have to rethink what you know and don't know about the asset.

H. Humbert adds:

My Step 1: Monitor all stops. This is from an Aught's (maybe '03 or '07?) Spec-Gathering in Central Park, per Larry Williams' Wisdom. It is also so appreciated that The Chair, his Dinner Table Guests & Friends, His Co-Opetition Friends (Spec-Listers) & his Superior Employees' annual efforts.

Nov

16

Everyone went to Hawaii last year. They all went to Europe this year. Everyone drives the same vehicle. People love to follow the herd. Hedgies, quants, teckies all looking at the same data, same correlations, all doing the same trade.

Nils Poertner writes:

being in a herd somewhat offers protection and one can save energy - as our brains like to save energy (constant decision making and testing stuff costs energy and our brains are already weakened via e-smog etc etc).

as a trader though - one cannot make any money long term if one is constantly part of the group - one is more like that rabbit that is hypnotized with the headlight of the oncoming vehicle. so one has to find a niche. energy is key in my view- to keep the energy up - as traders often lose it as time goes by (maybe a talent to not give a f*** about anything, too).

William Huggins comments:

i would argue that running with the herd minimizes the energy lost scrambling in all directions looking for an edge. unless someone has a refined technique for discovering edges and implementing them, its hard to conceive that active selection would overcome the "drift of industrialization". numerous studies (most famously jack bogle's) have shown that buying and holding the index is just fine and does in fact make decent money over the long term. when you factor in the costs of active trading, you really need an edge to overcome the friction imposed.

clearly, both strategies can be successful but one requires much more skill (and earns commensurate rewards) so i think its misguided to suggest that "one cannot make any money long term" by following the herd. you just won't earn exceptional returns.

Nils Poertner adds:

I think it is time to sharpen up in coming yrs- the reality is that most folks in finance (in particular at large firms) really don't have special skills compared to other professions in non-finance (yet they get paid so much more). The whole financial system has just gotten a bit too big - and time will be for those who go the extra mile - and not sit comfortably and hope mediocracy will be work out. many things will change anyway…many….medicine got to change - see how unfit and mentally challenged most citizens are by now.

Humbert H. asks:

You think if they don't know how to sharpen up just getting that advice will somehow help them find the way? What exactly do they need to do?

Nils Poertner replies:

1980 - til 2021 - bond bull mkts and good for lev assets (private equity, real estate), neg real rates. easy money - favouring a few more than others. with rising nominal rates, that is going to change. (had a lot more in mind - people are somewhat depressed, highly suggestible, joy missing, too)

William Huggins expands:

predicting regime shifts (and their direction) has proven to be quite challenging so i would start by ensuring that one doesn't get knocked out of the game when they come (position limits with exit numbers away from rounds, etc). that way, you might at least survive the turn. resilience seems essential but people who only know one-directional markets don't put enough stock in it.

something related i'm teaching tonight is that people's beliefs always trump the facts. i don't mean pie in the sky fantasies, i mean what people think the facts are, and what the implications of those things should be. but when the herd's thinking changes, their volume moves markets. perhaps the key is to identify the early rumbling (or other signs) that precedes a stampede? i'm inclined to expect a high risk of false positives though as it is a well-worn strategy to spook the herd from time to time.

Henry Gifford writes:

I used to wonder how running with the herd helped animals in the wild. Sure, some will likely survive, but what is the incentive for an individual to be part of that large target?

Then I found out about one technique deer and many deer-like animals use. Someone, maybe a human who can outrun a deer on a hot day (furry animals generally can't sweat, people can, thus people can cool themselves very effectively). chases after a herd. After a brief sprint one member of the pack takes off in a direction away from the pack. The human or other hunter might choose to go after the individual animal, thinking it is easier prey than the pack, and safer because there are only four hooves to avoid, not dozens. But the deer aren't stupid - one of the fastest and fittest is running alone. After a while the individual circles back into the pack. Now the pack, which wasn't running fast, or maybe not at all, is more rested than the hunter, who ran a longer distance chasing the individual deer. Now the pack takes off again, with the hunter after them, then another fit and rested individual animal takes off away from the pack, again and again. I assume they have other strategies.

Art Cooper adds:

This is the mirror image of how wolves hunt their prey.

Humbert H. responds:

Being in a herd offers lots of benefits. Clearly there are lots of pairs of eyes facing in multiple directions to alert others about approaching predators and emit warning sounds. Also, many predators tend to surround a isolated victim for a few reasons, one of them being that it's much harder for an individual animal to fight back when attacked from all sides. Obviously it's almost impossible to use this method with a herd. It's also more distracting for a predator to have to focus on multiple targets. Large herd animals find it a lot easier to fight a predator while facing them and a herd can protect the backs of all of it's members.

Now being a part of a "herd" or market participants is quite different. Market participants have no incentives and, typically, means to protect each other, and metaphorical market predators, whatever they are, don't really behave like a pack of wolves or a pride of lions. It's much harder to jump on an isolated market participant, unless it's some "whale" known to be in distress, and distressed "whales" don't run in herds anyway. You often have no idea why a market stampede has started, so imitation is more dangerous than for a herd animal. All the physicality of being a grazing herd animal goes out the window and this analogy seems of dubious value.

Henry Gifford continues:

The discussion was about pack animal behavior. The description from the deer expert sounds like he was adventurous and curious and brave enough to chase a solitary deer. I don't think North American deer exhibit pack animal behavior - I've never seen them in packs, only family groups, maybe they don't form packs at all - I don't know. I wish I knew why some fish swim in a group ("school"), but I don't.

I think I can judge the budget of a zoo by seeing how many deer-like animals they have. Such animals look much like deer, thus my description, and presumably have evolved to survive much like deer: eating leaves and running away. Zoos that I think have low budgets don't have the interesting predator animals kids see in books, but instead have many deer-like animals with only minor variations from one species to another, from one animal enclosure to another. Suffice to say there are many animals in the world similar to deer, but which are not North American deer, especially in Africa, where many or all those species found in low-budget zoos come from. Presumably some run in packs, even if North American deer don't.

The story that humans ate by outrunning deer-like animals has been around a while, but was finally documented by anthropologist Louis Liebenberg, who reportedly, in 1990, witnessed human hunters !Nam!kabe, !Nate, Kayate, and Boro//xao run down antelope in the heat of the day in the Kalahari desert in Botswana. Please don't ask me how to pronounce those guys' names. One time when I was googling around on the topic I saw maps created with the aid of electronic tracking devices that showed one or more of the parties to such chasing running fairly straight for a while, then circling around, then straight, etc. I don't remember if the tracking device was on a human or animal or both.

Another method has multiple humans chasing a pack of animals. One human gets tired chasing the animal that left the pack, chasing it on a zigzag or circular path, while the other humans jog slowly, on a shorter route, following footprints left by the pack, and soon the animal that left the pack rejoins the pack while the pack of humans is very close to the pack, with only one tired human in the pack of humans. If Randy has tried that method it would be nice to hear how he and his friends made out.

I suspect all the above has implications for trading in the same sense others have posted about pack behavior and trading.

Those guys in Botswana have at least one of the three factors some say are the reasons why marathon runners tend to come from Kenya and that area (the Rift Valley). One is that their ancestors lived in a hot climate (Africa) for tens of thousands of years, thus they developed limbs that have a relatively high surface/area ratio: long and skinny, optimal for cooling, and also optimal for moving back and forth (running) with minimal energy (low WRsquared) compared to short, stubby limbs (similar to the physics of pendulums). The second factor is that their ancestors lived at sea level for thousands of years, thus they have the ability to produce more hemoglobin (moves Oxygen to muscles) readily when they are at altitude. The third factor is that they grew up at a mountain altitude, thus they developed large lungs. I don't know if the hunters in Botswana had any of the other two. A mass migration from sea level to high altitude is I think not so common (or people from other areas would also be winning marathons), but reportedly many humans ate via chasing down animals for many years, presumably many who didn't have all three of these factors in their favor.

Then there was the argument in a Welsh pub that led to the annual 22 mile Man vs. Horse race, run since 1990. I suspect, but cannot confirm, that alcohol was involved. Some years the humans win. The human ability to sweat, and therefore cool the body, keeping it in a temperature range necessary for metabolic processes to function (running, breathing, not dying, etc.), is key - presumably the humans would do better in a warmer climate or in a longer race. I think it would be interesting to track the temperature and relative humidity of different race years vs. who won, but I don't have the data handy, and don't know if it is available on a Bloomberg terminal.

Larry Williams writes:

Correct on deer. Antelope and buffalo go in herds-packs, if you will. so do elk - a beautiful sight to see as the bugle sounds.

Zubin Al Genubi adds:

The Gwich'in natives in the Arctic run down the caribou on snowshoes. Caribou bolt, rest, bolt. Man runs runs runs without rest up to 60-100 miles.

The caribou vadzaih is the cultural symbol and a keystone subsistence species of the Gwich'in, just as the buffalo is to the Plains Indians.[4] In his book entitled Caribou Rising: Defending the Porcupine Herd, Gwich-'in Culture, and the Arctic National Wildlife Refuge, Sarah James is cited as saying, "We are the caribou people. Caribou are not just what we eat; they are who we are. They are in our stories and songs and the whole way we see the world. Caribou are our life. Without caribou we wouldn't exist."

I met Sarah James and spent a week with her in Arctic Village and up at hunting camp. She is an amazing person. The villagers and tribe have a beautiful philosophy of life and respect for nature.

Rich Bubb comments:

the herding/grouping re/actions is/are common in so many species' game plans & their instincts, then there's their need to hunt, defend, fight-flight, etc en-masse because of their evolutionary status vs predecessors. Humans same; hopefully.

Pamela Van Giessen writes:

Bison herds are led by a cow. And when she decides to move, they all move. Quickly. You definitely don’t want to be in the path of a bison herd on the move. Elk herds will go around you or they will make you wait for them to pass. Antelope herds will outrun everything. More deer get hit by cars than any other creature (except maybe raccoons). Perhaps they are at higher risk because they do not travel in large herds. The type of herd matters. One imagines there must be similar parallels in the markets.

Rich Bubb recounts:

about those cute furry deer etc… having a mini-herd slam into vehicle on a highway is rarely something I can evade. Got Deer'd 4 times in NE Indiana, only?. I think 1 of the mini-herds died, the rest either bounced off or got bumped out of the way, which also? causes very extensive collision expenses! When a shifty insurance office-drone tried to blame me once that I as to blame for the deer-car (b/c I was driving the car, not the deer). After the ofc-drone ranted at me for while, I said, "Here's how much time I had react (GOING 55MPH), then slam the phone's receiver down on my desk, hard. The drone lost that one.

Steve Ellison understands:

I never hit an animal while driving, but once I was on a state highway in Idaho headed to Hells Canyon through a forest. A deer shot out from the trees on a dead run and crossed the highway some distance ahead of me. I only saw it for a second or two, and it was gone. I was lucky to see it from a distance, because it would not have been possible to stop a car traveling 55 miles per hour in one second.

Richard Barsom offers:

Turkeys, they are super smart. I mean despite their rather undeserved reps of being "Turkeys" . They travel in large groups but send scouts out in various directions. The scouts are usually so fast that they send hunters on a wild goose chase so to speak. This is done on purpose to alert the group and frustrate the we be hunters. You could learn a lot from a turkey.

Oct

30

I can only do a few paragraphs at a time there is so much in this book; turns thoughts upside down.

One I just read; Thomas Jefferson's illicit affair and fathering a child with his slave. Wait! Hold on a moment —while widely believed— all the DNA tests shows is there is Jefferson bloodline. That’s all it can show. There were 26 Jefferson's living in the area and Toms brother Ralph was caretaker and overseer of slaves.

Thomas? Ralph? Someone else? Will never know for sure but for sure it may well have been another Yet the revisionist historians have hung it on Tom. Lots more like this.

Peter Penha writes:

Just an anecdote on your example: I know of two families where a child was fathered/sired with a female who was a slave or an emancipated slave. Both families discuss it as part of the family history and each specified that a home was built for the mother/child and in one case the family name given to them.

Considering Thomas Jefferson finances, perhaps the answer would lie in the building records and who owned the home in Charlottesville where Ms. Hemings moved to after Jefferson's death with her sons.

I was recently searching for other books by Frederick Lewis Allen as IMHO a wonderful writer and objective historian of his day and that brought me to a series titled the Forbidden Bookshelf (27 books in the series) - I only picked up Allen’s The Lords of Creation but there were a few titles that were “out there” as subject matter.

Gyve Bones adds:

There was a lot more inter-mixing between Africans and French colonials in the Louisiana colony, which had a Code Noir body of ordinances governing who could own slaves (only Catholics, no Jews nor Mohommedans), and how they must be treated. As a Catholic nation France required that owners of slaves must educate and raise their slaves in the Catholic faith, and could not break up families in a sale. Slaves could purchase their own freedom, and in New Orleans there was a large population of "free people of color". Many of the wealthiest of these freedmen were slave traders, and there were several large plantations in French colony owned and operated by free persons of color. Slavery was not a racial thing—just a matter of property. There was much less stigma around the idea of "race", and that culture has persisted to an extent into current day New Orleans, although those seeking to divide people along racial lines for political purpose have made significant inroads in destroying inter-racial comity in that community.

History records that French Canadian trappers had very good relations with the indigenous populations, and there were many such mixed marriages made. This same phenomenon was seen in Mexico after Our Lady of Guadalupe converted 9 million indigenous Mexicans to the faith. The Mexican nationality gave birth to a new "mestizo" race which came about when the Spanish intermarried with the native population.

Zubin Al Genubi suggests:

Trust by Hernan Diaz. Pulitzer prize. Stories About a stock market operator in 1920's and his wife. Very good with minor market relevance.

Stefan Jovanovich links:

Sally Hemings

Oct

19

Bonds oh so close to major buy point.

Humbert H. writes:

I just keep rolling over T-bills because I don't know any better. Higher for longer or something. At least the interest pays for my recent losses trying to buy all kinds of value stocks at the lows, only to see them broken. That's OK, the next bull market will bail me out completely.

Laurel Kenner comments:

You are never free to deny the truth. You cannot make it up ad you go along.

I bow to Larry. The biggest gains occur in insane bear markets. Because the government has seized control of the bobd market, he is right, especislly leading up to an election. You all should heed him when he gives the buy sign. But it still stinks. I guess you need the nose for success.

Larry Williams replies:

Well lets hope I get this one right and earn those kind words - the ultimate sweet spot to buy is not here yet but it is coming.

Zubin Al Genubi adds:

When the time to buy comes, you won't want to. Like 17% bonds in the 80's.

Richard Bubb writes:

So is the FED [Powell & Co.& etc.] gonna raise the rate, or try the Higher-For-Longer road? Personally I'm thinking the HFL is their better option. Reason: The Fed is notorious for doing one too many rate 'adjustments' that would fix itself if they hit the pause button/s. Back to my 'raise concern'…I think the 2% target is a chimera and going there is an unwinnable move for the Fed.

Humbert H. assumes:

Well they can’t inflate the debt away fast enough at 2% nor is it easy for them to achieve so I’ll assume inflation will stay higher for longer.

Allen Gillespie writes:

While there is a strong seasonal trade that kicks end here around Oct. 19-23 - good till Christmas, such that even during bond bear markets the market held levels for a couple of month, the fundamental issues are the following.

1. Fed Funds Futures are beginning to project a cut in short rates around May 2024 which then continue through the first quarter of 2025 and reach down to a level of about 4.5%.

2. Historical, average spread relations therefore suggest we are seeing a Niederhoffer switch in here where short rates go into the 4-4.5% range and longer instruments up the the around of the current fed funds rates and budget deficit amount. A true switheroo.

3. There is a strong seasonal here (particularly Oct. 19-23) which held even during bond bear markets. IA flush after a weekend would seem about right. In the bond bear markets, however, the range was only good for a couple of month.

4. The long-term fundamental backdrop is the following:

According to the CBO, "since 1973, the annual deficit has averaged 3.6 percent of GDP. In CBO’s projections, deficits equal or exceed 5.5 percent of GDP in every year from 2024 to 2033."

This is the inflation rate - so, if you want a real return on bonds your rates needs to be higher than these levels. That is now just barely true in corporates, but it is not true for government bonds.

If you just charge the inflation rate, there is no real no real return available to bonds. Granted, in the long run government should be neutral offering neither gains nor confiscation, but at any moment they are on either side of that reality.

Today, the CBO projects the deficit will run 6.1% for the next two years. They do have a core adjusted for timing shifting of 3.4% - but do you trust them will all the war supplemental budgets.

Humbert H. responds:

A cut in short rates in May? We have high deficits, strong likelihood of inflation above 2%, no real signs of recession, "higher for longer" is seemingly the consensus of the mainstream economists, but fed fund futures are projecting a cut? Doesn't seem to make much sense.

Allen Gillespie replies:

Election years start getting discounted about Feb/March - so market may start looking past the Biden agenda and the housing season come May will be in the dumps. Forward oil also 10% lower for next year on economic weakness. Oil ran in 3Q because someone probably knew. The energy squeeze in 1973 was 1 year long. Exxon just bought Pioneer, so they can export LNG - trade seems to be setting up to be long domestic production for export.

Oct

18

The market trains you to do certain things. Like this year with long sideways or down, the market trains you to take your profits on an up move rather than hold for a bull run. Then after the traders are trained the market will throw in 7% up move. Then having suckered in the trend followers reverts right back to down/sideways normal action.

The market (or the exchanges/mmakers/exchanges) seeks maximal flow which occurs during sideways and down chop. Thus the greater part of the action is sideways (current regime). I'm wondering when the change in regime to big up move will happen.

Nils Poertner comments:

there might be pain coming for lazy thinker. Lazy thinkers are those who cut corners, maybe they are intelligent to some degree, but basically they rather copy and paste other ppls opinion (then delude themselves it is their own opinion).

Zubin Al Genubi adds:

Like the Turkey says its real hard to get back in once the big up move starts. Its so much easier to buy a falling market. Its also tough to hold for the continuation move up rather than sell the bounces as one does in the down move. One good sign is slicing up through the big rounds. The rebounds off the round in the down market usually ended up in a continued down move.

Steve Ellison writes:

Or as the Chair wrote about Steve Irwin and the crocodiles he had captured, those who try to take money out of the market using the same technique too many times will find an ambush waiting.

In the archives of the old Daily Spec site, search on "crocs" within the page to quickly find the original post.

H. Humbert writes:

Steve hired expert handlers for some of the more dangerous animals he filmed with. A friend worked for him many times and said he was very careless. One time on the Leno set, Steve got too close, and a large Gaboon viper struck at his leg and just missed.

The moral is don't play with fire if you don't want to get burned, and don't get too close to viperids with 3cm fangs (they are pretty though).

Oct

12

Wall of worry

October 12, 2023 | Leave a Comment

JPMorgan’s Marko Kolanovic braces for 20% market plunge, delivers recession warning

H. Humbert comments:

Nobody knows anything. If anyone could predict that stuff with any degree of certainty, they’d be worth a trillion dollars over 5-10 years. I listen to what all kinds of analysts say and they modulate their own predispositions by reality, but it’s all worth nothing.

Zubin Al Genubi sees the bright side:

Excellent wall of worry.

He indicates a near-term bounce is still possible because a lot hinges on economic reports over the next few months. "[We’re] not necessarily calling for an immediate sharp pullback,” he said. “Could there be another five, six, seven percent upside in equities? Of course… But there’s a downside."

(Really stupid)

I'll also make a Popperesque non-disprovable prediction: Market might go up, but then again it might go down too.

Laurel Kenner writes:

Sometimes the wall of worry is made of steel-reinforced concrete, viz., late 1999 & 2007.

Humbert H. comments:

This particular wall of worry is made of cotton candy. Not many people on either side predicted the behavior of the market in the last 4 months. Whatever idea people have, they typically expect to be proven right or wrong relatively quickly, and usually proven right.

Laurel Kenner replies:

The smartest bond investor, Paul deRosa, quit several years ago because he no longer understood the bond market after what I think of as the 2008 financial coup. The market hasn't existed since then. This thing that has been committed will bear evil fruit. George Zachar, am I right?

Sure, it could take a long time. Homeowners and businesses locked in those crazy low rates. But the central powers can't keep up the charade. The bond market, what's left of it, will scream. Do we look away now?

Larry Williams doesn't mince words:

This is bullish.

Humbert H. comments:

I wouldn't dismiss any "frame" for predicting the future even if I don't agree with or can't evaluate the premise. Scott Adams, to whom I listen religiously, has a number of "frames" that sound crazy to me but may work. For instance "the most entertaining outcome is the most likely". I don't trade per-se, and the closest I come to is to try to buy value stocks at a local bottom, or sell a current holding to buy a new one of the "local bottom" variety an activity I used to be reasonably good at but have completely failed lately. I do think there is some sort of a possible "scientific" framework to predicting IPOs as they seem to have widely divergent short, medium, and long-term behaviors, seemingly more so than the universe of similar stocks in general. Some of the reasons are obvious, such as the lack of a track record, but even with that emotions seem to play an outsized role.

William Huggins writes:

years ago as a student we ran an investment club with real money that did quite well. the problem, as usual, is leadership succession so in time the org attracted a technical analyst who had lots of prophecies but would offer no reasoning for them ("i'll explain if i'm right…."). this charade impressed some of the newbies but not the vets who demanded to know the basis under which their funds would be invested. being in the skeptical camp, i offered a simple binary prediction exercise: presented with 15 1-year price charts, he simply had to indicate whether to following year would be up or down (we could have corrected for drift but were sufficiently confident his methods were hogwash that we didn't care). if he could get 11 of them correct, that would constitute (roughly) 95% confidence that whatever his techniques were, they weren't producing random results. we didn't tell him but we used 15 of our actual previous holdings which we knew the results of. he got 4/15 correct and promptly stopped trying to inject "woo" into our investment process.

Sep

7

talented musicians often have support groups, family, friends, even fans. Whereas in trading, when we screw up even a little bit (after many good yrs) the spouse will just throw us with tomatoes and if we are employed - our risk capital cut or we are fired. am half-serious here - being a trader is bloody hard. Very much under-appreciated.

Zubin Al Genubi points out:

We traders have the Spec List!

Jeff Watson writes:

In the late 70’s, I made it a firm and fast rule to never, ever discuss my P&L with my wife….or anyone for that matter. She has no clue as to my positions, and has no idea whether I made or lost money that day. Most successful guys in the pits were the same way with their wives. We saw too many guys complain to their wives, the wives got pissed and nagged them to death, and the negativity provided a catalyst for more losses. Many on this list adhere to the same rule.

H. Humbert comments:

As usual, Jeff speaks wisdom for the ages. The problem is that spouses typically can't determine whether fluctuations are short term, long term, relevant, or irrelevant. A few years ago, my wife logged on at the end of a quarter to get the account value for estimated taxes. It had been a very profitable quarter, but the account was nose-diving that day. I'll never forget her calling out "306, 304, 305, OMG 301, 299!!!" like some panicked automatic altimeter reading. Instead of "pull up, pull up!" she was saying "get out, get out!"

Hernan Avella asks:

To what extent can one really hide one's P&L with a life partner? It's evident when one is thriving. Savings balances, new properties, ventures, new toys, travel, charity contributions. Short term fluctuations are irrelevant, but at the end of the day you are making a bundle or not and your wife knows it.

Jeff Watson replies:

It works for many of us at this dinner party. When one is thriving, does one spend all that money, or does one keep their powder dry for the inevitable big hit?

Hernan Avella agrees:

Absolutely, cash management is an often-overlooked aspect that really demands attention. Think about it: How much opportunity cost are you incurring by running an extremely volatile trading operation that demands a surplus of cash? And man, those big hits? I've been there. It just makes the whole trading thing feel pointless. Ever wonder how many traders, even some big names we're familiar with, end up with lifetime records in the red? Imagine someone starting small, compounding at 40% for a decade, then raising assets 20-fold… and after all that, takes a massive loss. Poof! That trader hasn't earned a cent in profits. Sure, in the real world, they're pocketing yearly fees and stashing money away, but in the grand scheme of things, their investors are at a net loss. High Watermark agreements? Always a gray area. This industry has its shadows. At the end of the day, CAGR should be where our focus is.

P.S. As of now, even the most conservative brokers are offering intraday leverages around 15x for Spu, with a major chunk of the cash invested in bills. Despite a VIX hovering around 13-ish, in just the past five days, we've seen 6 moves that are 25 points or more.

Aug

23

Paul Tudor Jones used to say that whenever one of his portfolio managers was going through a divorce, he would pull his money. Sooner or later, he or she would drop some money. (fear/flight center activated)

Most of us may not go through a divorce, but I often wonder: In a car, that has an automatic gear system that has this one position that is hardly used. And it is called "N" for neutral. When we operate from a neutral/stress-free point of view, then we probably trade the best. (compare that with ppl who engage in endless personal drama or drag you in w emotional stories or looking for a fight.)

Zubin Al Genubi agrees:

Good advice. Don't trade during a life crisis.

Stefan Jovanovich writes:

The real gear heads among us will already know that "neutral" exists in automatic transmissions so that the driver has a positional clutch. Naval engine room telegraphs have the same feature.

Nils Poertner adds:

there is a fx strategist on twitter (I think he gets paid by some supra-national now, ex Goldie). anyway, he has strong FX views /shares data etc - and at the same time strong political views. I often wonder: how would he do as lone trader over time?

Aug

20

It would be interesting to look at the daily serial correlation of major markets last few weeks and months. I would posit it has turned positive or more positive than usual. I will take a shot at it. And if positive what does it pose for the coming days.

Zubin Al Genubi adds:

One of the the longest stretch of lower lows consecutive or nearly. 1986 had 8 down days in a row.

Big Al computes:

Rolling 60-tday autocorr for SPY back to 2018:

Looking at the calendar on Daily Spec made me wonder about this: SPY - Rolling count of down days in every 20 trading days:

Aug

13

Inflation back up because fed has raised rates—when will they figure it out - high rates cause inflation.

William Huggins responds:

That's what Erdogan believed in turkey too but those beliefs crashed the lira. Rates (chosen) are a response to inflation (explicitly too).

Larry Williams replies:

Higher rates mean more money into the economy…hence inflationary.

John Floyd writes:

I think Larry probably has some careful thought or evidence behind this in and is not likely influenced by a Crucian Thanksgiving upcoming, MMT in the ‘hood or the like. I am not sure I agree given MV=PY, the collapse of M in the US, UK, Europe, rising financial stress, China headwinds, etc. But I would love to hear the other side.

Larry Williams responds:

MMT has some deep insights—rates cause inflation is one of them.

Stefan Jovanovich writes:

Apologies to all for what is another heretical comment from someone who thinks the United States lost its greatest advantage when it joined the other nations of the world in establishing a central bank as the issuer of sovereign currency IOUs. "Inflation" is always and everywhere a credit phenomenon; the supply of legal tender - the unit of account by which loans are measured - is never the cause. It is, as William implies in his remark about Turkey, the response; the hyperinflations in Germany, Zimbabwe and the moderately awful ones in Argentina and Turkey and elsewhere are not caused by money printing. The money is printed in response to the fact that the country's credit supply has been destroyed; all that is left is to run the rapid wheel of money supply. The prices for things have gone up because the Covid shutdown and regulations were the economic equivalent of a war; the regulations destroyed businesses (including our family office's last operating company; we formally dissolved at the end of last year because there was no reason left for us members to own securities collectively). The destruction reduced the supply; the transfer payments from Trump and Biden gave people the additions to their personal balance sheets that allowed them to spend more.

H. Humbert comments:

Only those with a lot of cash get more money, any new borrowers wind up with less money, and many potential borrowers are scared off by the high cost of debt. Do people with a lot of cash to begin with have a high propensity to spend their extra 2-3% after taxes, enough to compensate for the countereffects?

Larry Williams disagrees:

Wrong. The largest payer of rates is the Gummint -  it goes, one way or another to many. Soon I will post chart to prove point but look at Japan and low rates to inflation.

Nils Poertner writes:

we live in a predatorial world - in which inflation is obviously deliberately created to benefit some and hurt others. it still goes in cycles - eg EM fx and inflation - Turkish Lira and Brazilian Real the fx and inflation figures may go the other way - as in previous yrs…as those countries were pretty early w tightening and it is going backwards now.

Larry Williams responds [tongue in cheek?]:

That is so so wrong that someone causes inflation to hurt/help others.

Big Al posits:

Governments need inflation to reduce the future value of their present promises.

John Floyd writes:

There is a myriad more drivers in Japan both economically and culturally driving things. Debt, money velocity, ethos on bankruptcy, ethos on price hikes, demographics, zombification, lost decades. yes govt ownership of debt growth depends on whether money spent or saved.

While I on the topic, those are the headlines generally carried in Turkey and created the narrative; beneath that and related are many different ingredients that put Turkey where it is today, and those are the things to watch for a turn one way or the other; you can be sure the current leader is not going to do a public about face on the below causality belief system, but there are other things happening geopolitically and on the macro. I wrote in 2020 about the challenges; they are pretty much unchanged and give clues what to watch for.

Larry Williams responds:

Sure always drivers but some are race car drivers and mean more and as a general rule.

Stefan Jovanovich offers:

The NY Fed's definition of what they call Underlying Inflation

Their August 2023 reading of the UIG

Bud Conrad writes:

My views on what causes rising prices and declining purchasing power of the dollar:

I follow the simple axiom that inflation will rise when too much money is chasing fewer goods. (And the reverse). The rising quantity of money starts with Federal Government deficits: They print Treasuries to cover the deficit, borrowing new money they spend that exceeds taxes. Traditionally, the public would buy Treasuries to gain guaranteed interest. Banks did the same. When banks make loans they do that by printing money out of thin air given as new deposits at the banks for borrowers to spend; as for example in buying a house with a mortgage. As loans expand, money supply expands almost by definition. A few decades ago, much of Treasury issuance was bought by foreigners with the dollars they accumulated from their trade surplus from the US buying more foreign goods than it sold. The Trade Deficit became the support for the US government Budget Deficit. Foreigners took the dollars that exporters gained and exchanged at their Central Banks for local currency to pay workers, and the foreign Central Banks bought Treasuries. China and Japan had $1.3 trillion each in Treasuries backing their own currency issuance. But foreigners have begun to slow such purchases as they realize that the US dollar is not as good as gold. China has sold a third of its Treasuries, and Russia sold all of its holdings. So foreigners are not the buyers of our government debt now. They are trying to de-dollarize for both financial and political reasons, with the risk that if they turned to net sellers, they could drive rates higher. While domestic institutions provide some buying for themselves and customers, they are not big enough to cover all deficits.

In the current situation, of $ trillion deficits, the Fed becomes the "lender of last resort" that prints up new money to accommodate the new treasury issues, in the form of QE and expanding their balance sheet; which is accomplished by creating new deposits with which to buy Treasuries (and MBS). They increased the money supply, now by about $6 trillion since 2009. They supplied enough buying power that interest rates were kept low. Inflation as measured by consumer goods purchasing was commensurately low, because foreign consumer goods were manufactured in Asia at a wage rate of one fifth of the US. We could just print money to buy cheap goods. The government CPI is manipulated lower with hedonic substitution, calling technological improvements like more powerful computers as a decrease in price, and using rental equivalent housing prices. Their resulting measure of inflation is about half what it should be. Even more seriously: a comprehensive measure of what the dollar can purchase should include asset prices; namely stocks, bonds and accurate housing; and commodities like oil to be a more inclusive indication of changes in the purchasing power of the currency. We had low CPI but higher asset prices when the Fed forced rates below usual market levels, and that drove stock prices higher, (which is not included in the government inflation measure). In summary, the foreign expanded supply of goods kept CPI low, so inflation was below the expected growth in money alone might have indicated.

We are in a different world from before 1971 when international trade was settled in gold, and currency issuance was limited by having backup gold. Our government (and the rest of the world) are creating new deficits and new money at unsustainable levels. The expected new gold backed Currency from the BRICS is expected to replace the importance of dollars to world trade. Politically, the US dominance is declining with losing wars and over spending. Deficits will expand to cover the aging baby boomers demographics. The Fed will be creating trillions to buy the Treasuries to fund the deficits. This quarter Treasury funding is scheduled at $1 Trillion new money and Q4 is planned to be $800Billion (maybe more when the taxes slow in recession). There will be cycles, but the big move is to create new money by the government and banks which will decrease the purchasing power of the dollar in the decade ahead.

Summary differences from common beliefs:

1. Inflation starts from government deficits. (It is affected by many things, but this is the fundamental driver. (not wage push, consumer demand, price gouging, interest rates))

2. Cutting inflation requires less government deficit.

3. Raising interest rates by the Fed is not a very effective way to control inflation.

4. The Fed is forced to raise rates when government deficits and inflation rise; to keep the markets functioning so lenders get some real return. (Not the reverse)

5. We can get a slowing economy AND inflation together. With no anchor to the currency, this is the usual pattern and has happened a hundred times in many countries. (The opposite is expected in the Fed raising rates to fix inflation)

6. Inflation can go much higher than in 1980 when it hit 20%, because we have 120% Debt to GDP now, and it was 30% then. It took three waves.

7 Expect currency destabilization, inflation, and no deflation in the foreseeable future.

Zubin Al Genubi comments:

Credit creation cycle fuels inflation. As credit is given, asset prices go up at the margin. More collateral leads to more credit in a self reinforcing cycle. In contrast to financial assets, Prices of goods demand/supply curve is linear. Financial assets are convex crating booms busts. FED should focus on financial asset price not goods cpi.

John Floyd responds:

Look at money supply, fin stress indicators, consumer buying power info adjusted as savings rate is below pre Covid stimulus in many countries , etc…that will tell you a bit of odds of prospective future infl from demand side …supply side a bit trickier as reshoring, ESG govt led direction takes away Mr Smiths can’t see hand. Simpler equation is to ask how many times the CB’s get it right.

Stefan Jovanovich adds:

Goods can boom and bust because of the order cycle. Customers will double even triple orders on the upcycle and then threaten to pull them in the down cycle.

Aug

5

Trees, mostly

August 5, 2023 | Leave a Comment

old gray mare prob at 3-month hi at 35%.

Lott/Stossel: Election Betting Odds

books read this weekend:

The Hidden Life of Trees: What They Feel, How They Communicate - Discoveries from a Secret World

The Battle for Investment Survival

The Tree in My Garden

Trees: A Complete Guide to Their Biology and Structure.

i find the study of trees - especially how high they grow, and how they develop buttresses, and how they branch out and compete with other trees for light - immensely revealing for the various moves.

Big Al suggests:

The Age of Wood: Our Most Useful Material and the Construction of Civilization

Nils Poertner comments:

In many parts of central Europe, the Beech tree used to dominate the landscape thousands of yrs ago. Used to be well over 2/3 - and even today it is like 1/3 in Germany. Why? They tend to grow super and sort of take away all the light from slower growing trees. An oak tree would not stand a chance.

Gyve Bones suggests:

Long term strategy: planting a grove of oaks in a forest in France to be ready in 150 years to replace the roof of Notre Dame de Paris when it burns down.

Peter Saint-Andre offers:

Oxford's Oak Beams, and Other Tales of Humans and Trees in Long-Term Partnership

Peter Ringel writes:

For the last two years I am involved in a project for a German horticulture company. They mainly produce young plants of ornamental plants aka flowers. As a little side project (in early stages) they also produce Paulownia trees (as young plants).

Paulownia is the fastest growing tree in Europe. They originate from Asia. (Some criticize them as invasive species.) Typical commercial applications are wood for instrument manufacturing, wood pellets for energy production or particle boards. The wood is very light (caused by very fast-growing).

See a Paulownia grove.

Propagation is a little challenging. Usually it is done in-vitro via Biotec-lab, which we have. It is not the easiest variety for in-vitro. We also had some success to propagate via cuttings from mother plants.

Laurel Kenner comments:

Terrible idea to grow these, down there with tree of heaven, kudzu and bamboo. Yes, they are quick to grow, but also impossible to eradicate or even to contain. I am not an eco-hippie, just a gardener.

Zubin Al Genubi adds:

A friend planted a tree farm about 25 years ago with rare exotic hardwoods such as Koa, Bubinga, Cedar, rosewood, mahogany, ebony. It is a multigenerational project but some early woods are being harvested. Some of the rare woods will be very valuable as they are disappearing in their disappearing native habitat. There are numerous governmental grants benefiting the project as well.

Laurel Kenner responds:

I like the project. The idea is not to grow "trees" that are in effect big weeds. Pawlonia is illegal in my state, CT, as is Norwegisn maple, another nasty weed-tree planted in a less enlightened day because it grew fast. They often come down in storms because they're weak. One memorably crashed over my driveway in a big blow and its eldritch too brach rang ny side doorbell.

Peter Ringel replies:

Yes, storms are an issue, especially during the first years. My big mouth was referring to the EU government as hippies, because subsidies and grant policies are highly ideological here. Not referring to anyone else.

The church of Greens has Europe tight in their grip and currently they like Paulownia. There is a trend / hype growing. Other psalms the church likes are "renewable raw materials" or "CO2 neutrality". Paulownia fit these mantras. (plants eat and need CO2 to confuse the church)

Paulownia are not really new to Europe. Introduced to Europe 100 years ago or so. So far they were unable to survive in the European wild in size. Maybe because of frequent stronger winds? On a farm, as industrial product it makes a lot of sense to me. I am obviously biased here, because this would be our customers. It is a nice economic product. E.g. after about the first 2 years of growth, farmers cut them back near the ground level. This timber can be sold. They rapidly grow back and faster than without cutting. A case of eat your cake and have it too. One argument is, to use this locally produced timber instead of importing from South America, Asia, Finland or Russia.

forgot: Paulownia on farms are usually all clones of hybrids. Like a mule, they can not reproduce themselves into surrounding areas.

Vic's twitter feed

Jul

28

Scientists stand on the shoulders of giants and knowledge advances. Economists on the other hand keep stepping on the same rake. @GrantsPub

Bud Conrad writes:

The underlying science for Economics is not agreed upon, and so predictions are as often wrong as they are right. Economists spend lots of time criticizing each other. The different names for schools of economics are debated. No one debates what school of Algebra of Chemistry is right.

I spent quite a bit of time trying to fit data to the IS/LM model that is the bedrock of first year Macro Economics, and found it flawed. The most used book was by John Taylor (the Taylor Rule and one time assistant Secretary of the Treasury), and Robert Hall (NABE, and Stanford professor). I showed my analysis to Hall, who agreed that the model didn't work.

So it is not a joke about stepping on a rake. It is fundamentally an unsound intellectual base, that is the cause.

H. Humbert adds:

FWIW, even scientists don't agree when it comes to quantum mechanics. The 2022 Nobel Prize in Physics has been awarded to three scientists for their contributions to understanding quantum entanglement and advancing the field of quantum information. The existence of quantum entanglement proves Einstein wrong. If you care what that means, you can read the following. But I guess most on this list won't give a damn about quantum mechanics and not to mention quantum entanglement.

How Einstein challenged quantum mechanics and lost

Stefan Jovanovich comments:

Thx to KKL for making the point BC and I are sharing. The simple test of science is that its rules can predict the future successfully. We all accept the quantum theory's ability to predict motions in time and space so that GPS in our phones continues to work. Einstein was not "wrong"; his ideas "failed" to be a completely successful predictive model for everything we want to know. Economics has no successful predictive models about anything. If it did, our silk tie Marxist and others would make far less money as croupiers in the finance casino.

Peter Grieve writes:

Newton was the last alchemist. Einstein was the last classical physicist. He was wrong about a few quantum things, but right about so much.

In physics we talk about "background". Background is something that affects the world, but is not affected by it. The background is not a dynamical variable. God is background in most modern religions. A set of non-accelerating frames is background in Newtonian physics, along with a Pythagorean method for measuring distances ( "metric"). Einstein reduced the background by making the two things above (really just one thing) into dynamical variables. He also found a revolutionary new symmetry of the world, called Lorentz symmetry. This is everywhere, including in quantum theories.

I forgive him for being wrong about some quantum stuff. I share his distaste for certain aspects, but the mathematics of quantum theory is so beautiful. I don't think quantum mechanics can be a final theory. There will have to be something much different, and much better, still to come. Of course I'm speaking a bit loosely in the above.

Stefan Jovanovich asks:

Question for PG: What do you think of Dirac's criticism that normalization is "wrong" because it is ugly?

Peter Grieve replies:

I agree with Dirac. Feynman thought that the renormalization series actually diverged! The Hamiltonian diverges too, but physicists don't mind, because it works. Quantum field theory has a lot of ad hoc features.

The French mathematician Michel Talagrand often jokes about this sort of thing. He mentions "…the physicists' fairyland, where they discuss mathematical objects that don't exist, and even prove theorems about them!"

My wife's specialty is nonlinear differential equations. She uses the first few terms of divergent series also, and gets good approximations. Renormalization is ugly, but the rest is gorgeous.

Nils Poertner asks:

do you have any example/application for trading/investing - so there is benefit for a wider audience?

Peter Grieve answers:

Unfortunately, I don't. Perhaps someone at the dinner party might be stimulated by this thread, and further the discussion. Free range conversation sometimes has this effect.

Zubin Al Genubi comments:

Science is not what people agree on, it is only what can be disproven as random.

Kim Zussman writes:

What about quantum economics? Predictions are validated by going backwards in time.

H. Humbert responds:

If one is looking for short term trades related to quantum science, the short answer is No. If one is looking for emerging technologies that will give birth to new technology industries, there are indeed something there depending on the time horizon. You often see the average Wall Street analysts on CNBC throwing jargons like quantum computing around as if they know something. I can tell you they don't know squat.

If anyone is interested in where this technology is heading, you can perhaps watch this long video which is approved for public release.

Peter Grieve writes:

I recently learned that a derogatory graffito about my student residence at Caltech is written on the Moon. I lived in Dabney House, and at least in the 50s through the 80s the graffito "DEI" was everywhere. It stood for "Dabney Eats It". Apparently, residents of our house liked a food service item that other students found unpalatable.
Anyway, the astronaut Harrison Schmitt was also a Dabney House guy (before my time), and while he was on the Moon during Apollo 17 he scratched DEI into the Lunar surface.
There is also a story that DEI is inscribed on the back of the plaque on the Pioneer 10 or 11 mission. These plaques were intended to be a possible first written communication with alien life.

Christopher Cooper adds:

And as I recall, “Eats it Raw” was the follow-up phrase. Or, at least it was when heard in my House, Fleming (next door to Dabney).

Jul

14

like Sidney Homer used to say- "sooner or later every generation is shocked by the behaviour of interest rates."

Hernan Avella disagrees:

I don't think many people can be shocked, given the data we have from the 80's. Most asset holders are older folks anyways, that have the memories of the Volker era deep in their heads.

Stefan Jovanovich offers:

Edward Chancellor interview

High Interest Rates To “Slay” Zombified Companies | Edward Chancellor & Joseph Wang

Kim Zussman adds:

America’s Retirees Are Investing More Like 30-Year-Olds

At Vanguard, one-fifth of taxable brokerage account investors aged 85 or older have nearly all their money in stocks

William Huggins responds:

i suspect a good part of that boils down to how one's asset portfolio is defined. most studies of brokerage accounts don't account (haha) for the real estate, pension, insurance, or physical assets of those being studied. if most of my income is derived from a secure pension, its (mathematically) a pretty good approximation to drawing the yield from a large investment grade bond portfolio (less the liquidity). owning your home (usual by 85) would similarly constitute a "housing cost equivalent" yield, as would any reliable health benefits being drawn. seen in that way, one's discretionary funds being kept in equities would be quite reasonable.

Zubin Al Genubi reminisces:

Sure would have been nice to own 17% bonds. 5% not too bad though.

Nils Poertner offers:

Big investors rush into bonds after ‘cataclysmic’ year

Capital Group predicts $1tn will flow into debt markets in next few years as investors move to lock in higher yields

Henry Gifford writes:

In the 1970s my father bought some New York City municipal bonds. At the time there were rumors that the city government was going to go broke. I heard my father say “How can the government go broke? When they want money all they have to do is send people bills.”

The city government defaulted on the bonds. It was widely reported in the news as a disaster, with various solutions to the terrible problem proposed. I was only a teenager, but didn’t see a problem with the government not being able to borrow money any more. I still think it would be great. But, most people believed it was a terrible problem, with disaster looming.

My father reacted by buying more of the bonds – “default” meant they mailed his checks one week late. The bonds were triple tax free: no federal income taxes, no NY State income taxes, and no NY City income taxes. The bonds paid 28%. It was the only time in my father’s life that he borrowed money – to buy more of those 28% bonds. I have no idea for how many years he was collecting 28%.

I started buying apartment houses in Manhattan when I was 20. It was normal to pay 12% interest. One time I bought a small building – only four families – with the goal of replacing the 12% seller-financed loan with an 8% bank loan on an owner-occupied property. I moved into the building, fixed it up, but never managed to get a city inspector to come inspect and remove all the violations without inventing some new ones, as I never bribed an inspector. But for a long time I dreamed of refinancing a little bit of my real estate at 8%.

Nils Poertner responds:

tangentially speaking . we would need to have experience from bond traders of the 1970s and 1980s, today is more leverage though and we have more complex system so not sure how much that would really help. collective mind has been in a long mental bear mkts as well. we need nerves of steel in coming yrs and imagination.

Jun

27

Ergodicity - odds of group equal odds of individual over time. Risk differs in coin toss and Russian Roulette due to absorbing barrier. Adopt strict risk aversion in trading. Survival is key.

Big Al suggests:

Luca Dellanna on Risk, Ruin, and Ergodicity
May 29 2023

Author and consultant Luca Dellanna talks with EconTalk host Russ Roberts about the importance of avoiding ruin when facing risk. Along the way Dellanna makes understandable the arcane concept of ergodicity and shows the importance of avoiding ruin in every day life.

Ergodicity: Definition, Examples, And Implications, As Simple As Possible, by Luca Dellanna

Larry Williams asks:

What the fun of life with modulated risk?

Nils Poertner wonders:

why do so many traders self-sabotage themselves (self-sabotage is perhaps a strong world but from the outside world it looks like that). some deeper religious guilt thing or so? addictions?

H. Humbert responds:

You can get your fun from winning instead of from the risk taking it takes to win.

Larry Williams asks again:

And how do you win without risking???

H. Humbert answers:

You can't. I was reacting to "the fun of life with modulated risk" comment. You can enjoy the risk taking part, the winning part, both, or none. To me, simply enjoying the risk taking part incentivizes the wrong thing, but enjoying winning, the right thing. You could say that simply enjoying taking risks will lead to winning but then every gambling addict would be a winner, so it's not that simple.

Zubin Al Genubi responds:

As a practical matter money management and convex asymmetric payoffs. Recognizing the risk and the extent is a big part of the puzzle. There is a large range from the coin flip to Russian Roulette not quite recognized by static statistics. The time element is important, hence ergodicity.

Larry Williams states:

Risk within reason but still risk - keeps us young!

May

29

in what other areas, apart from financial markets and sports betting, is there vig? and what is really relevant for everyday life? and how to avoid it?

maybe we don't see it that way because of Gell-Mann Amnesia affect.

Hernan Avella responds:

There’s a rich literature on rent-seeking behavior. It’s pervasive, Pharma, Telecom, Agriculture, Natural Resources. Not all lobbying is RS but the majority is.

Vic asks:

is there a universal law of vig where it goes to 2% in all activities like sports betting?

Jeff Watson offers:

I wrote this in 2009 about vig:

The Vig Keeps Grinding Away, from Jeff Watson

Steve Ellison comments:

Games that advertise that they're commission free usually charge the highest vig of all …

Mr. Watson's statement was written well before all the retail brokerages offered commission-free trading, which I contend simply means convoluted execution that costs customers much more than the $7.95 commissions that existed previously. "Where are the customers' yachts?", indeed.

Separately, the way the CME evolved is a good example of the Professor's constructal theory that all systems evolve to increase flow and velocity.

Hernan Avella disagrees:

Your insights on electronic trading seem to lack sufficient grounding. Abundant evidence disputes your hypothesis, highlighting the significance of the percentage extracted rather than the total volume. The evidence is clear that more opaque markets, like credit and emerging debt, are more expensive, for everybody except for a selected group that invests heavily in keeping the status quo. Electronic markets are more transparent, more anonymous, standardized, continuous, centralized, offer multilateral interaction and informationally more efficient.

Zubin Al Genubi responds:

Give the evidence then, if its so abundant, rather than your usual vague negative comments.

H. Humbert comments:

The beauty of long term investing is there's no vig and there are no taxes, other than once or twice in a few years.

The origin of the word is interesting. It's a Yiddish corruption of a Russian (or some other Slavic) word pronounced "vi igrish" or "gain", but it's more like "winning in a game", and the root means "game".

Alex Castaldo adds:

Interesting. The word can be found in online Russian dictionaries.

"vigorish" has a similar pronunciation, though the meaning has changed to be the fee for the game instead of the winnings.

Nils Poertner writes:

we want to battle against vig in all aspects of our lives. almost build a register where there is vig and share it with family and friends.

Henry Gifford comments:

Vig is one of the many things I find it helpful to view with an understanding of the laws of thermodynamics. The laws of thermodynamics describe the movement of heat in the universe, and because all energy is either heat now or becoming heat, they could be called the laws of heat.

The idea of “follow the money” to understand a system or organization or relationship is closely parallel by “follow the heat”, and heat follows clearly defined laws.

In approximate inverse sequence to importance, the fourth law says that if things A and B are at the same temperature, and things B and C are at the same temperature, then things A and C are at the same temperature. This is also called the zeroth law because it is so basic it should have been thought of first. The fourth law reminds me of the unlikelihood of much true arbitrage existing.

The third law says nothing can be cooled to absolute zero, because that would require something colder to absorb the heat, and nothing can be colder than absolute zero.

The first law says energy can neither be created nor destroyed.

The second law, most analogous to vig, says that heat always flows from hot things to cold things, and never flows the other way on its own. This law is the most profound, with many implications.

For example, one implication of the second law is that a car engine cannot convert all the energy in gasoline to mechanical energy - some will leave as heat that is not useful (except for heating the passenger compartment during the winter). Vig. A utility power plant burns fuel and about 31% of the energy in the fuel gets to the customer’s electric meter - 5 or 10% transmission losses (heat escaping from wires is “lost” - see first law), the rest is waste heat at the power plant. Vig. Various devices can reduce the amount lost to heat, but these devices have too high a vig themselves.

Big Al adds:

The first law makes me think of markets (not the Fed or banking) where money is neither created nor destroyed. For example, in the FTX collapse, the media talked about all the money that was "lost". But of course it wasn't lost, it was simply transferred from one group of entities to others.

Hernan Avella critiques:

This line of thought fails empirically when looking at deflationary crises, loss of crypto keys, central bank operations, bad loans, bankruptcy.

Henry Gifford responds:

Loss of crypto keys and central bank operations both follow the first law - printing money leads to inflation (if inflation is defined as a lowering of the value of money), destroying some of the money in circulation by losing keys, or destroying a dollar left in the pocket of clothing getting washed, increases the value of the remaining money.

I have heard the term “deflationary crisis” before, but don’t believe there has ever been a crisis whose root cause is the increase in the value of money.
In the saving and loan crisis of the late 80s, lenders sometimes asked borrowers to make sure they borrowed enough to make the payments for two years, as it was taxpayer money being lent out, and the lenders were collecting enough vig to make it worth going under I s couple of years.

A bankruptcy stops wasteful behavior, and the threat of bankruptcy causes people to take steps to prevent it. But I guess the waste in a government can continue forever, apparently violating the first law, while also proving that a perpetual motion mechanism really can exist, violating both the first and second laws.

Larry Williams comments:

printing money leads to inflation—data does not suggest that to be true

May

18

What are the most basic market states traders might need to model?

1. Going up
2. Going down
3. Reversing

Ranges, trends are subsets of the 3.

Next step is modeling what simple mechanism causes the 3.

Hernan Avella writes:

There are no “simple mechanisms”. But I would start with the microscopic dynamics of “the turn”. Yesterday [2 May] was a good day to study.

Big Al offers:

An interesting thought experiment is to imagine that you have a chart of a random walk but you still have to trade it. Money management, trade sizing, stops, limits - could you still trade it?

Zubin Al Genubi responds:

Random walk with drift would be the default basic state (S) with random factor u say with sd2. What simple rules might model market activity. Like ants and bees following simple rules but building coordinated complex structures. Adam Smith first mentioned emergence in his invisible hand.

Hernan Avella responds:

Isn't this the basis for most uniform trading that occurs?. While the other big chunk of participants "think" they have a model, "think" they have patterns, but are essentially doing a version of the same?

This reminds me of the infamous Kirilenko paper:

We examine the profitability of a specific class of intermediaries, high frequency
traders (HFTs). Using transaction level data with user identifications, we find that high frequency trading (HFT) is highly profitable: 31 HFTs earn over $29 million in trading profits in one E-mini S&P 500 futures contract during one month. The profits of HFTs are mainly derived from Opportunistic traders, but also from Fundamental (institutional) traders, Small (retail) traders and Non-HFT Market Makers. While HFTs bear some risk, they generate an unusually high average Sharpe ratio of 9.2. These results provide insight into the efficiency of markets at high-frequency time scales and raise the question of why we don’t see more competition among HFTs.

Zubin Al Genubi adds:

Yes HFT guys probably have done it at market maker level. Chair says yes you can trade random walk with drift with buy and hold due to drift. MM and HFT may also have order flow info they buy which may or may not be a different process.

Adam Grimes writes:

Absolutely and of course… that's why the hurdle rate for any test has to be the baseline (unconditional) drift in the sample.

[Re the "thought experiment"] Unless I'm missing something, not profitably (over a large sample size). All these other things are important, but they, at best, keep you at breakeven in a RW environment (i.e., no "signal" or "edge" possible). In real life, a comparable approach keeps you paying the vig with consistency. As for the thought experiment, correct?

Big Al responds:

For me, the thought experiment doesn't have a correct answer but forces me to think more rigorously about issues such as money management, trade sizing, stops, limits.

Andrew Moe writes:

Chair often advised that rather than considering just up/down or above/below a given threshold, one might look at "up big"/"up small"/"down small"/"down big" as classifiers. This is particularly salient in information theoretic calcs (ie, entropy) but interestingly moving to deciles offers little or no improvement.

Zubin Al Genubi adds:

I've been interest in agent based modeling of complex systems using simple rules. A new wrinkle would be adding a random factor following power law distribution in tails which stock data displays.

Jeff Watson responds:

That sounds like a perfect task for ChatGPT.

Gary Phillips adds:

Absent from the previous post on modeling was any mention of time frame. There is greater model risk the shorter the time frame you’re trading in, because price action is more random. Realized volatility, liquidity, gamma, and 0DTE options can and will, shape the trading environment. And, has been demonstrably evident the past 10 weeks, each day has its own ecosystem and market structure. This makes modeling in a short time frame a fool’s errand, and its participants useful liquidity providers.

As one moves to a higher time frame, positioning, money flows and sentiment become most important. Fund flows and positioning, along with cross asset flows, target dated funds, corporate buybacks, seasonal factors, and factor flows take on more meaning.Yet, even if one could ascertain the above factors with certainty, he wouldn’t know if the data was priced into the market or not.

And finally, while there may be a lag or even a disconnect on a long term time frame, macro economic factors, geo-political factors and CB policy, will inevitably exert its influence on the market. But, we don't know if we have experienced the event(s), nor know how traders will react to the event(s), that will finally move the market out of its current trading range.

A pragmatist's model then, is to know the market one’s trading, and to have a well defined process. Then one can make (bias free) observations and accurate, probability-based assumptions.

Mar

24

Pirate Latitudes, by Michael Crichton. Aubriesque tale of privateers and Spanish Galleons.

As the SPEC list is about books, as well as markets, counting, and barbeque.

William Huggins adds:

single best book on the history of finance that i've come across is William Goetzmann's Money Changes Everything. He's a Yale finance prof with a background in art history and archeology and its shows throughout the book as he looks at the roots of our toolkit (sumerian word for "baby cow" is the same word they used for "interest", etc). a very good description of the 1720 bubble with the hypothesis that the bubble was a reasonable reaction to the shifting expectations around insurance companies and the lines of risk they could cover. he also suggests that Venetian gov debt (1172) snowballed into the creation of western capital markets, which in turn propelled the west ahead of "the rest" (to steal a ferguson quote). three solid chapters on the tools imperial China used to increase its "span of control" over its rugged territory. 10/10.

(I used to use it as the required reading in my history course until I realized too many were balking at its size)

Jeffrey Hirsch responds:

Appreciate the reco Mr. Sogi. Almost done with Pam V’s reco on Keith Richard’s autobiography, Life, which is far out. Here’s one from me, The Immortal Irishman, by Timothy Egan. Irish revolutionary becomes a Civil War general. Adventurous tale across many continents.

Laurel Kenner writes:

I offer Harpo Speaks, the autobiography of Harpo Marx, the silent brother. Plenty of poker, speculation, and spectacular success, including an account of his Soviet tour, to entertain this List well.

Pamela Van Giessen responds:

Harpo Speaks is fantastic. For a meditative introspective read on things out of our control and how the body copes A Match to the Heart, by Gretel Ehrlich.

Big Al suggests:

I will recommend The Biggest Bluff: How I Learned to Pay Attention, Master Myself, and Win, by Maria Konnikova.

First of all, it's just an entertaining, well-written story. But in her study of poker and portrait of one of the best professional players, Eric Seidel, there are many lessons for traders.

Penny Brown writes:

I recently re-read the cult classic, The Moviegoer, by Walker Percy. It has nothing to do with trading but the main character is a stockbroker. Read it for the wonderful prose and the delineation of Southern characters with great dialogue.

Also, re-read A Fan's Notes, Fredrick Exley's memoir of growing up under shadow of his father's football fame in Watertown. It's amazing that this book even got written since Exley makes three trips to mental institutions where he undergoes electro-shock and insulin therapy and was an inveterate alcoholic for his entire life. You can see the influence of Nabokov and Edmund Wilson (among his favorite writers) in his prose style.

And then I read Embrace the Suck - a book I literally found at my feet on the sidewalk - hey, the price was right - and I assumed it had a special message for me. It certainly did. It describes the training undergone to become a Navy SEAL including the infamously horrid "Hell Week" that resulted in the death of one participant. It has lots of lessons for traders as it extols the virtues of discipline, focus, planning and most of all, a willingness to embrace suffering, as a means of moving beyond mediocrity.

One guy's way of shaping up for the ordeal of SEAL training was to run the Badlands Ultramarathon - a little 100 mile race through the desert at temperatures over 110.

Okay, I'm not going to try that - never could have even in my prime. But it got me out of my chair committed to doing a full set of Bikram's yoga postures including the ones I hate because I can't do it - Salabhsana - or hate because it hurts - Supta-Vajrasana. As the author says, "you've got to embrace the suck everyday."

Gary Boddicker adds:

I recently read Mule Trader: Ray Lum’s Tales of Horses, Mules, and Men. I originally picked it up for the regional interest. Ray was based about 60 miles down Hwy 61 from me in Vicksburg, and traded mules and livestock throughout the Mississippi Delta…but, it turns out a few of the Chair’s favorite writers, Dr.Ben Green and Elmer Kelton, were running buddies of Ray and are mentioned and vouch for his character in the book. Many tales of trades, moving the herds as the tractors slowly replaced them from California to the Delta. In one case, he bought 80,000 horses in South Dakota, and arb’d them to where they could be used. The book rambles a bit, as it is essentially an oral history, but many lessons within.

It brought to mind a discussion I had years ago over dinner with an buddy of mine who farms about 20,000 acres in NE Louisiana. “Gary, there is isn’t a real farmer in Louisiana who picks up that government agricultural census and doesn’t mark down that he owns at least one mule. We are damn slow to admit we gave ‘em up.” I haven’t fact checked him, but a betting man says the mule census is Louisiana is overstated.

Gyve Bones responds:

I have two copies of that book… one autographed by the re-publishing editor. It’s a great book.

Mar

19

My theory is the market is mostly self organized. One important mechanism is stigmergy - spontaneous, indirect coordination between agents or actions, where the trace left in the environment by an action stimulates the subsequent action. The traces basically is time and sales or on a cruder level charts and trade data.

H. Humbert comments:

My theory is that markets do sometimes self-organize, but at the very basic level they operate in two regimes: normal and "emotional". Of course they are always emotional to some degree, but what I mean is this: they are good at processing distributed data, that is averaging out the noise and extracting information from multiple participants who create noise and add bits and pieces of information. But that is only when the information is widely distributed. When like now key pieces of information come from very few participants in random bursts (as compared to the typical regime) the markets get swept up in emotion generated by each jolt and self-organize around that emotion. Even in normal markets they can abandon reason and self-organize into manias or panics, more into manias when there is prolonged liquidity, but more prone to do so when there is a distributed information glut and participants just generate noise.

Gary Phillips adds:

No doubt that (decentralized) collective behavior is shaped by adaptive evolution. That is, efficiency gains are a result of stigmergy and constructal theory. Perhaps, there is even a coordination between the two.

The recent explosion in 0DTE options volume comes to mind. And, the stigmergic and constuctal theories may explain how the phenomenon evolved. This self organized collective behavior emerged as a perceived improvement on futures as a vehicle for day trading i.e., better liquidity, flexibility, and leverage.

Both stigmergy and constructal theory are self-reinforcing processes. The more something works, the more people it draws, and the more people available to improve it further.

Mar

7

Now, when every fool and his mother fruitlessly attempts to interpret what size the brief case means, this book is timely, very well written and highly recommended:

Limitless: The Federal Reserve Takes on a New Age of Crisis

Also, another interesting read, 180 years old, with lessons for the modern reader, Walter Bagehot’s seminal 1873 book, Lombard Street: A Description of the Money Market.

Kora Reddy suggests:

PDF download: Credit Suisse Global Investment Returns Yearbook 2023 Summary Edition

here is a two-line summary (as TAPAS [there are plenty of alternatives]), as opposed to the one-line summary i used to do: figure 50 is interesting "higher the inflation higher the interest rates thus higher the stock market returns." table 15, short rubber spot & long coal is the trade in the commodities.

Mar

6

Futures prices, particularly financial futures like S&P and Bond prices, have a relationship to the cash markets which can be arbitraged. It is a function of cash flows usually interest borrowing costs and dividends, but it depends on being able go short and long the cash/spot markets. My questions is this: seems to not hold in hard assets like crude where there is currently large backwardation. You can buy Dec 24 Crude at a large discount and have been able to do so for some time. Specifically, is it possible to short the spot market for crude? Is there a counterparty that will accept this trade? It seems that for term structures like crude futures, the prices are an actual prediction of supply and demand and not an interest rate arbitrage.

Zubin Al Genubi responds:

With crude, storage (or not to store) is part of the future price. I read there is a lot of Russian crude stored in ships now. I'm not sure how that figures in.

In backwardation (tight market) normally one buys the future waiting for convergence with spot. Selling spot- yes you can, but delivery is an issue.

Big Al ruminates:

Not sure what "shorting the spot price" would even mean, other than Zubin's point where you have to have crude for delivery. Doesn't the concept of shorting a contract inherently involve a future price point? You could have 1-day futures, but then the vig might be far more significant.

If we model it on stocks, then shorting spot crude would involve "borrowing" somebody else's oil and then selling it for delivery. But then you're just back to why futures exist in the first place, aren't you?

But speaking of the term structure of crude, I ran across this:

Forecasting WTI crude oil futures returns: Does the term structure help?

Abstract
Nelson-Siegel (NS) factors extracted from the term structure of WTI oil futures are shown to predict subsequent WTI holding period returns in-sample. This in-sample predictability is not diminished by augmenting with macroeconomic indicators or oil market specific predictors. Allowing the decay factor in the Nelson-Siegel model to vary over time improves in-sample predictions at medium horizon return forecasts. We conduct out-of-sample forecasting exercises on models that use NS factors, such as a simple two factor model that uses a composite leading indicator along with the NS decay factor, and a LASSO model that combines NS factors with macroeconomic indicators and oil market specific predictors. These models significantly reduce forecast errors relative to a no change benchmark across a range of return horizons and futures contract maturities. We also find consistent evidence that models that use the NS factors result in trading strategies with higher Sharpe ratios and better skewness properties than buy and hold strategies and historical mean strategies.

Relatedly, the Nelson-Siegel model.

Feb

28

Self-Organization in Biological Systems

The concept of pattern-formation as a result of self-organization is common in such disciplines as chemistry and physics. For instance, in Chapter 1 we discussed the patterns formed by the Belousov-Zhabotinsky reaction, the ripples on a sand dune, and Bénard convection.

The challenge, is to see whether particular instances of adaptive, group-level pattern formation can be explained largely or fully in terms of a small set of relatively simple behavioral rules for members of the group. These rules are often implemented in the form of a mathematical model or simulation.

Interesting definitions found useful for markets:

A Pattern is an arrangement in time or space. It is created internally without external direction. It is created locally by individual element's reaction to nearby changes without larger awareness or control. The complex patterns result from simple local rules. Very market appropriate.

How does self organization occur? Random fluctuations and positive feedback can form patterns or trends. Humans follow rules, I do what you do. Sygmergy, information from work in progress, such as chart patterns, can accelerate creation of patterns.

Self organization in complex systems exhibits emergent properties known as changing cycles such as Bernard cells. Change occurs due to positive and negative feedback, outside influence, information from neighbors, stigmergy. Self organizing systems can be quantified and modeled! They tend to be stable but can exist in chaotic states, chaos meaning without pattern. Alternatives to self organization are: Leaders (powell), blueprint, recipe.

Nils Poertner writes:

probably a good book to read indeed - thanks for sharing.

yeah. in the human created world - we tend to think leaders run the show - and they do- to some extent
but obviously it is left-brainy to think that is all and not a way make money from (e.g ppl looking at the lips of Powell to trade the next tick…..close to insanity - that is). it is more a mass psych kind of game.

Zubin Al Genubi adds:

Schools of fish self organize to avoid predators. The are able to coordinate by the Trafalgar effect where communication with neighbors is fast like Lord Nelsons ships. Traders self organize - bulls v bears. What is their mode of communication? Volume, tape, executions, speed, change, amount of change, order depth, density of trades, resting orders, many others which could be quantified.

Nils Poertner responds:

fish don't get the clue from adjacent fish (alone) - - they "tap" in their common field (morphogenic field) of that special group - see Sheldrake on this note it is "same" time almost. wild animals have this super- power since they think less - thinking (the cousin is worrying) seem to interfere here (actually in theory humans have the same). can*t verify this but Sheldrake says: the idea is that the brain of animals (also humans) is more like a receiver and sender at the same time - sort of like a TV that emits as well memory is not in the brain per se.

Zubin Al Genubi replies:

It's possible to build a simple model for fish schooling based solely on reaction to the neighboring fish. I wonder if trader behavior might be modeled with similar simple parameters. Trader buys when other traders buy. Trader sells when others sell. Negative feed back starts as buying slows. Test parameters.

H. Humbert responds:

Morphogenic fields are contained within the organism and used for cell coordination such as embryonic development, so it's hard to believe that the fish respond to it as a group. As for morphic resonance pioneered by Sheldrake, while I think it's a promising idea that would explain a lot, casually using it to explain simple events without extraordinary proof is like using some random primitive god to explain natural phenomena. If he is right, than we have to discard most of our knowledge about biology, psychology, etc.

It also seems that modeling traders, many of whom are equipped with machine learning devices, and many who like to buy when others sell, as fish relying on a couple of sensory signals seems too simple to predict the future. Seeing clouds and predicting rain kind of works, but it's not a good starting point for weather modeling by an individual in modern times given the state of the art.

Nils Poertner replies:

Yes probably. But then a lot of older cultures knew it all the way already. see Amazon tribes people or study Carlos Castaneda. Sheldrake found some statistical evidence of telepathy in rare occasions. I don't know to what extent that is correct - for my own purpose I am interested in "intuition" which is somehow linked to telepathy eg being a tad earlier in mkts than others etc.

[Re: Sheldrake: below, a review of Sheldrake's A New Science of Life. -Ed.]

A Book for Burning? by John Maddox, Nature, Sept 1981

As things are, however, Sheldrake's book is a splendid illustration of the widespread public misconception of what science is about….Sheldrake's hypothesis is no better than the hypothesis that a person equipped with a water-divining rod is able to detect subterranean water as a consequence of some intervening "field" generated by the presence of water, and his proposals for experimental tests no better than the argument that since water-diviners succeed in making money, there must be something in the theory.

H. Humbert writes:

As I mentioned, using this theory without proof is like using some primitive deity to explain rainstorms and earthquakes. But I wouldn't be as adamant as the reviewer in attacking it. It has puzzled me for a long time that so many people somehow don't recognize that there is something fundamental missing about our understanding of reality, and different aspects of it. Like when people start talking abut AI becoming sentient while we have no clue about what it really means to feel pain or see colors in the human sense from any kind of scientific point of view (vs having some regions of the brain light up). Or what I mentioned about how various instincts/behaviors are inherited by animals. Like can 20,000 or so genes, mostly used to encode the creation of proteins, really transmit to animals what foods to like, how to have sex, how to be afraid of certain predators, how to fly south from Maryland to Brazil over the Gulf of Mexico and predict hurricane seasons fairly well, or a thousand other complex concepts. Or more fundamentally, what enforces various laws of physics over vast regions of space. So strange theories that try to explain the nature of the universe shouldn't be so easily rejected even if they lack in the scientific method orthodoxy.

Nils Poertner comments:

good that people here are skeptical. as always - for traders - believe nothing, verify things for yourself
(and start with things that are relevant and simple) and go from there.

Feb

27

Wouldn't the adjusting up of the prior contract data to the current destroy information about the beneficial effects of inflation on stocks and owning assets?

Leo Jia responds:

I had considered about this and believe the adjusting does destroy some information, but one can go around the problem.

Generally I use one of two schemes to adjust: subtraction, or division, each destroying the info in a different way. Which one to use depends on one's analytical formulas to be used. For instance, if one is concerned about absolute price differences, like close of today minus close of 2 days ago, then one needs to use the subtraction scheme; one the other hand, if relative difference is of concern, like close of today divided by close of 2 days ago, the division scheme should be used. Using it the right ways nullifies the information destruction.

The subtraction scheme can produce an artifact of prices becoming negative, so mostly I concentrate on the division scheme.

Btw, I open-sourced the adjusting routine called Stitcher (in Julia) on GitHub.

Steve Ellison adds:

Much depends on what you are trying to achieve by using adjusted prices. I use them to make sure my calculations of net price changes and n-day highs and lows are accurate in the event such calculations cross a contract roll. When back-testing, I typically do selection using the adjusted prices and then translate the specific occurrences back into the contract that would have been used at the time of entry– then I can compare the net change to the original price, resulting in a more meaningful percentage change.

Feb

27

This has long been in my mind, recently put to text and published on my webpage. Happy to have any feedback.

Statistical hypothesis testing in trading strategy development

So What is statistical hypothesis testing? From Wikipedia: “A statistical hypothesis test is a method of statistical inference used to decide whether the data at hand sufficiently support a particular hypothesis.”

Though the exact procedures are still not without debates, the general idea is: if a hypothesis can be confirmed as true or valid, it has to stand out from the random processes that apply to the same matter of the hypothesis.

So, it sounds very logical. For instance, if you want to prove that you have good skills at the football penalty kicks, you do say 100 kicks (without a goalkeeper) and compare your results with those of a thousand idiots. Say you scored 97 and rank the 11th among the thousand idiots, or the top 1.1%, then the committee confirms your skill, or in other words, they confirm that your claim of having good skills at the football penalty kicks as true or valid. That means that since you rank at the top 1.1% they trust that you truly have the skill and you will score similarly in future kicks.

Steve Ellison comments:

I am one of the "idiots", ha ha, who has found patterns that back-tested with a statistically significant edge, only to find they did not work very well when I actually traded them.

Part of the problem is that, with a threshold of p = 0.05, if you evaluate more than 20 hypotheses, you are likely to find some that show significance just by random chance. And this problem is multiplied in any study that involves multiple comparisons.

Furthermore, in an era of widespread machine learning, some institution is likely to find a pattern before you do, and may either arb the edge away or discover at its own expense there really is not an edge. David Aronson, who was on the Spec List for some years, discussed "data mining bias" in his 2007 book Evidence-Based Technical Analysis, when machine learning capabilities were in their infancy compared to today.

Big Al adds:

That appears to be a big problem with all sorts of research. It's easy to imagine a large, diverse group of researchers forming a sort of "meta-researcher" that is data snooping on multiple levels, even though the individual researchers are not aware of it.

As a trader, one must be skeptical and ideally have enough data to split it into a test dataset while reserving an out-of-sample data set for confirmation.

When I'm feeling more optimistic, I think of the market as layers of players, from very large down to minute (e.g., me), and most of the market bulk is the result of the bigger players making macro moves, which creates effects that smaller players can trade off of. The issue now is that, with AI technology, tens or even hundreds of billions of dollars can be deployed to black-box strategies that constantly search for smaller anomalies and patterns. But then the Palindrome's concept of reflexivity kicks in as all those black boxes create effects of their own.

Zubin Al Genubi writes:

I am looking at what factors causes price change and why and how. Model it to understand its function. Test with Monte Carlo. Its gives you a step ahead of price. Volatility clustering is a classic example. This what modern biologists do.

Jeffery Rollert responds:

My mental model is a sphere of sponge, suspended in space, with rain droplets hitting it everywhere all the time. It’s a variation of Al’s idea yet with more dimensions. One additional dimension is the age of the idea. As ideas are older, they are absorbed and move to the center where they have less impact on the balance. Market moves are represented when the sphere’s center of gravity shifts from the geometric center. Sort of plate tectonics but with a lot of plates.

Feb

23

Why is the close price so much higher than trading at the close? Why is June ES 38 points higher than March ES? That's a really big spread. It must mean something. And to adjust the back data to continuous must remove or affect information.

Justin Klosek responds:

March-June ES spread is due to the difference between the (assumed) dividend rate of the S+P and the risk free rate.

Investor A who owns the portfolio of S&P 500 stocks receives the dividends and the return from the changing stock prices. Investor B who owns the futures and a Treasury bill has (to first order) the same portfolio. He does not receive the stock dividend but instead earns the T-bill rate, which is now higher than the dividend yield. So the futures prices have to adjust to account for this.

If the risk free rate is 4.75% vs a dividend rate of 1.25%, that 3.50% difference is reflected in the futures roll—about 87bp per quarter, or around 38 points, plus/minus.

Kora Reddy adds:

Fisher effect as chair says here:

The Performance of Market Index Futures Contracts

Zubin Al Genubi comments:

Seems it would behoove one to own bonds with the futures to capture the roll. Especially now.

Justin Klosek asks:

Long T-bills plus S&P futures is no different than owning cash stocks…. what drives your “especially now” comment?

Zubin Al Genubi responds:

If FOMC is done at 5 1/4, in 2 increments 3 months apart we are 6 months away from the end of rate increases. Powell's bond "put" so to speak. Yields are high. Seems, like today [22 Feb], the bonds have decoupled from stocks. Why not carry some bonds to support a portfolio of futures? Carry margin is much less with futures than stocks. The overnight market is a big plus of futures over stocks.

Jan

26

The first chart needs mouseover code, but otherwise…

An Analysis of Deaths in U.S. National Parks

Charles Sorkin comments:

Before I even scrolled down to the horizontal bar chart, my guess for most likely cause of death was "car accident." The bubbles with the highest death frequency are the ones with extremely high road traffic, such as Yosemite, Great Smoky Mountain NP, and the Blue Ridge Parkway. I'd expected that the super-remote parks, like North Cascades and Denali would be more death-prone, but perhaps visitors are far more prepared for contingencies.

H. Humbert writes:

A man seems to have killed himself or slipped into one of the boiling geysers in Yellowstone this past summer. His foot surfaced a few months ago.

Having hiked pretty extensively in Yellowstone, I can attest to there being more danger from falls than grizzly bears. You can be hiking along and all of a sudden find yourself on a cliff.

My biggest fears when hiking have been lightning (when hiking on a ridge with a quick moving summer storm rolling in) and trees — as in being in a lodge pole pine forest trying to get out and over much deadfall and the wind picks up.

A few of us were wandering far off trail, exploring mud pots and geysers. All of a sudden the ground started sinking under me. Fortunately I reacted quickly and alerted the rest of the group. That was way scarier than the wet grizzly paw print we came upon one time.

Most park visitors don’t venture far off the beaten path which is why drownings and falls are the leading causes of death. Those who do venture out tend to be more prepared and knowledgeable. Most of the time.

There is an older gentleman who does a lot of off-trail hiking in Yellowstone to see wildlife and he records his hikes. He seems to have mastered the art (and science) of wildlife spotting while keeping himself safe.

Shortly after he did this hike, he did another where he had to make himself scarce from two grizzlies. I learned a lot by watching what he did to stay out of harm's way.

Zubin Al Genubi connects:

The category Death by GPS has some lessons for quants who don't look up and around.

Big Al adds:

An interesting fist-person read:

‘That Girl is Going to Get Herself Killed’

There is risk in the wilderness — even in mild adventures — and yet we still seek to reason with it, to assign order to it, to control it, and to tempt it.

H. Humbert responds:

Thanks for the read, Al. It is spot on. I would add that even when we are careful and respectful and experienced, anything can happen. In the wild, especially a place like Yellowstone, change is constant so what may have been safe last year may not be so stable this year. Even for Stan Mills who is super experienced, respectful, and cautious, he found himself between two grizzly bears. As he pointed out in his video on the incident (not the one I linked to), when two bears meet, chaos can ensue and he would have been right in the middle of that mix if not for his swift action and a whole lot of luck. For those of us bit by the wild bug, we do tempt it. Because hiking in these places offers a “high” that is almost impossible to obtain any other way because when you are in the wild you have to be so aware of your surroundings that there can be no space in your head for anything else, and you feel and hear and see more of everything. I call it being in the complete and total present tense. But I have no illusions about trying to order or reason with it.

Dec

27

The market has always been a discursive struggle between the bulls and the bears. A system of oppositions that one might think, would logically or functionally negate each other. Of course, the relationship never stays linear for long and the inevitable convexity leads to a Hegelian resolution of thesis and antithesis.

The dialectical tension between an "impending" (but reluctant to manifest) recession (inverted yield curve) and a resilient economy (Q3 GDP +3.2) and labor market (unemployment 3.7%) underscores the struggle between the "higher for longer" bears, and the bulls who believe in the equivocation of "pause" with "pivot."

A reactive Fed will continue to focus on a strong jobs market and keep its tightening bias, which WILL inevitably cause a deep recession; however, the recession won't come "soon enough" for the Fed to save the day. And, the seemingly gradual descent into negative growth, will allow the recession trade to dominate its opposition.

Larry Williams responds:

The actual economy down but not out or negative:

Gary Phillips replies:

i get what you're saying. (perhaps the economy is strong enough we never have to endure a recession in 2023.)

but, methinks you're missing MY point: the longer the economy "holds on", and the longer it takes for a recession to rear its ugly head, the longer the Fed continues QT ( good news is very bad news). on the other hand, if there was an impulsive and deep, drop in growth, (bad news would be welcomed with open arms) the Fed would be more inclined to pause or pivot sooner (de facto put).

Read the full discussion here with additional contributors and charts.

Dec

7

If Timing in mkts is everything - I mean everything - how can one improve it?

Few yrs ago, there was this mixed martial arts boxer called Chuck Liddell. He had amazing timing like no other one else had - and was mostly a counter-boxer. Eventually others figured him out but he has his run. He observed his opponents carefully- - and in the right moment broke the pattern and leaped forward when his opponent didn't expect it. Same parallels to trading mkts perhaps?

a - observe everything
b - develop a bit of courage for the leap (but only after a and plenty of practice)
c - practice.

William Huggins responds:

reminds me of Miyamoto Musashi's exhortation to his students that breaking the opponent's rhythm was the most important part of competition. He suggested a number of techniques (fight with the sun behind you, chase opponent onto uneven ground, stab at the face, etc) but I wonder if those are of limited applicability when squaring off against faceless (and innumerable) market-based opponents simultaneously.

his Book of Five Rings is hundreds of years old and thus free everywhere.

John Floyd writes:

Extending on your martial arts analogy….and bringing in the law of everchanging markets…timing is improved in terms of outcome and consistency if one recognizes and can adapt to prevailing conditions, using experience and intuition, and what tools to pull out of the quiver and employ.

This article from one of my teachers talking about my esteemed dojo mate Paul Williams is a worthy read on an application of timing.

Zubin Al Genubi adds:

One of Miyamoto's strategies was run, then suddenly turn and attack while fleeing. I've found it a useful trading strategy. He would also arrive to a duel early, or late, throwing off the opponent's timing.

Paolo Pezzutti comments:

Intermarket relationships can provide good timing. For example when bonds print a new 20-day it is quite bullish for stocks over the next days. Buy signal last Friday at the close. Since Mar 20 holding 3-5 days T-score up to 4. Last 10 trades after 5 days all positive. (Chart on TWTR.)

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