Jan

6

I asked Gemini if the Nvdia stock price milestone dates associated with Jensen Huang's famous leather jackets. Here is the timeline of Jensen's jacket evolution alongside Nvidia’s stock milestones:

The one that caught my attention is Lizard Era in March 2024. At that time Nvdia price was around $100 and after Jensen's Lizard Jacket appearance Nvdia stock fell 20-25%. And here is Jensen while debuting new chips last night. We will learn soon if the Lizard Jacket is a helpful tool for front running Nvdia stock!

Steve Ellison likes the idea:

Very unique and insightful analysis. My wife read a biography of Mr. Huang. When he was growing up in Oregon, his immigrant relatives wanted to put him in a private school, but the school they enrolled him in was a reformatory. After that life experience, I am pretty sure that Mr. Huang can't be intimidated by Donald Trump or Xi Jinping.

Peter Ringel adds:

agree. probably useful insights can come from seemingly absurd corners. Like the weather of sports teams in NYC.

Dec

31

Reviews of 2025 and previews of 2026:

Mr Hirsch:

Stock Trader's Almanac

- Got many new ideas for research and helpful context
- also learned that I use the term Santa wrong!

Adam Grimes:

Trading the Changes: Structure, Regimes, and the Path to 2026

- always brilliant
- lots of actionable stuff and gems

Larry Williams:

Larry Williams’ 2026 Market Forecast: Cycles, Risks, and Opportunities

Dec

29

So as Silver trades yet another stratospheric (psychological) target, there are a few questions. On commercial side, both Demand and Supply are price-inelastic. Whatever industrial uses are, Silver is hardly substitutable, especially at the time when other metals are just as pricey. And on new Supply side, much Silver gets out of the ground as a by-product from mines not primarily operating as "a Silver mine". So, again, Silver production can't be easily jacked up during Silver's rise.

On non-commercial side, however, it's the opposite. Supply/Demand balance works as it should. $77 (or $100 lol) market would cause Buyers to be abandoning bids; while grandmas might start dusting silverware off and storming pawnshops. Any other considerations?

Peter Penha responds:

Exactly - if you look at the Silver Institute Supply / Demand models it shows we have been in several years of deficits (still in deficit of course this year and next) - Mine supply peaked a decade ago

If you add up all the non industrial uses of silver (Jewelry, Photography+film (Chris Nolan & IMAX), and all silverware) they do not make up the deficit.

So in the Silver Institute model and I am talking 2023 $28 silver price we have some 20% of total ounces that need to be divested every year to maintain supply/demand.

60% of uses are industrial - solar is the future everywhere now….for those missing the US battery trade —> the Biden era tax credits for solar are now Trump credits for solar+batteries & the AI data centers are now going to be Bring Your Own Capacity and storage & connect to the grid.

Read the full post with additional comments.

Dec

19

Often when I listen to specs I hear "off-topic" book recommendations. Examples:

"The most important book to do with trading is Secrets of Professional Turf Betting by Robert Bacon" — The Chair. A book about parimutuel horse betting.

"The most important book to do with the stock market is Horse Trading by Ben Green" — A game theorist & friend of The Chair. A book about selling horses

"I can find new trading strategies on almost every new page (Thinking Fast and Slow by Daniel Khaneman)" — The Chair's Brother (Mr. Roy Niederhoffer). A psychology book

"Our entire investment philosophy is based off this book (Snow Crash by Neal Stephenson) — Fred Wilson of Union Square Ventures, a Tier 1 VC firm. Its a sci-fi book.

"One of the most important things you can learn todo with investing is creative writing" — Jeffrey Hirsch. Not a book but still an off-topic research recommendation.

I have never regretted reading an "off-topic" book. Any more of such recommendations?

Nils Poertner responds:

Coaching Plain & Simple, by P. Szabo, D. Meier (book about learning - how to coach oneself in a way)

Asindu - what books to get rid off, to burn, what is an obstacle in your life is also relevant. Early 2008, I visited a French friend on Lehman trading floor in London. V nice guy, senior analyst for their credit models, high IQ 130 plus, bit gullible though. He was surrounded by over 20 books of advanced math on either side of his desk. I had the urge to get a huge sledgehammer and whack down the books…you know.

Larry Williams suggests:

Zurich axioms. A must read.

Peter Ringel agrees with Larry:

I have them on my wall. Besides some of the lists by Vic, Larry, Adam Grimes and some other. Valuable.

And did you find the Daily Speculations booklist?

Asindu Drileba writes:

Yes. I forgot about Zurich Axioms. Thanks. This Daily Speculations list is good, I actually wasn't aware of it.

Dec

11

I rarely use a squawk box. But on a day like FOMC I do. I don't trade news, mkt is usually earlier. I use it more like an alarm clock. So Y/D I tuned in and so did all the other zillion retailies.

They have a tiered model, there the premium is real-time (+ latency…hmmm) and the rest is delayed. A few major news like FOMC are real-time also on the free tier.

So seconds before the FOMC announcement, at the moment of highest attention by potential future paying customers, they piped in an add:

In the voice of Trump (surely AI generated):
"You are not on the premium feed. You are missing out. Lets make the news great again“

Brilliant

(not an endorsement of news trading )

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

9

Came to our financial firm 2007 and gave a 100 page presentation full of bullet points and cartesian logic (why housing boom will last). Either 3,5, or 9 bullet points per page.

At the end of the presentation I was tempted to go over to the presenter and ask him "why do you love your wife? (I didn't). The answer might have been bullet points.

Pamela Van Giessen writes:

Michael Korda tells in his memoir, Another Life, of the time that Simon & Schuster hired probably the same prestigious consulting firm to study how to improve revenues/profitability. Prestigious consulting firm (after taking the prestigious consulting firm fee) told the publishing company that they should publish more bestsellers.

Laurel Kenner comments:

I bet the prestigious firm concluded with ‘Key Takeaways’ as a final insult to the intelligence of the client.

Asindu Drileba writes:

I heard that people pay consultancy firms not for their knowledge, but for the fact that executives use them as a scape goat. If an executive wants to pursue policy X. They simply hire a consultancy to recommend policy X. If policy X ends up as a disaster (legally, morally or financially). They can simply say "Policy X was an idea from XYZ consultancy", we had nothing to do with it.

Peter Ringel adds:

a variation of this are fighting owners/ partners about policy. If decision pipelines are blocked, external council is used. Like a neutral arbitrator. I think, these are the main situations externals are used. Usually a good reason to short the entity, especially outside of markets. If they don't have the capability to decide and act on strategy in-house, it‘s a red flag.

Henry Gifford responds:

Even better is hiring a licensed engineer to instruct everyone to do something stupid that they know won’t work, so everyone who did as the engineer decided is blameless.

Jeff Watson offers:

A consultant is a person who knows 1000 ways to make love to a woman…..but he doesn’t know any women.

Oct

20

I first heard this piece as a teenager, sitting in the theater
watching Barry Lyndon, and I was transfixed:

The Messiaen Trio performs Schubert's Trio No. 2 in E-flat Major, D. 929

I did not know this Mendelssohn work until today and I wondered if
somebody said to her, "Oh yeah? Well, try it in heels!"

Yuja Wang Mendelssohn Songs Without Words Op 67 No 2

Peter Ringel writes:

my emergency high vola setup always includes Chopin. everything to stay off tilt.

Big Al responds:

Gotta love Chopin for the workday playlist.

Chopin: 24 Preludes, Op. 28, Vladimir Ashkenazy

Another discovery for me (fades out but still enjoyable):

Interpreti Veneziani, Antonio Vivaldi RV711 Gelido in Ogni Vena, Davide Amadio

Oct

19

In Casino Royal (2006) there is a speculator called Le Chiffre. He would manage money for war lords & other "underground" clients. He would take positions in markets, and then "manipulate them". For example in this clip, he takes a short position in an airlines company, then later bombs a plane belonging to it.

This year, I am starting to think that Le Chiffre is real. Someone opened a crypto account on Hyperliquid (decentralized exchange) and made an $88m profit from short positions that very day.

Cagdas Tuna responds:

Good catch! I have been reading these whales news since March-April 2025 mostly tied to Trump’s policy shifts. It is not difficult to guess who those Le Chiffres might be related to!

Peter Ringel writes:

I wanted to place 1 Nov in my calendar - as a new Mkt Risk date based on Trumps post. Only to realize, I placed this date regarding tariffs before. This makes this old news to some degree. And all of this is potentially an overreaction / a play.

Ed. - lagniappe: Forget Sean Connery, Watch James Bond Make His Real Debut on TV

Before Connery registered his license to kill in the 1962 hit Dr. No, millions of viewers were introduced to Barry Nelson’s “Bond, Jimmy Bond” in a 1954 episode of the CBS anthology series Climax! The show’s producers secured the rights to adapt Ian Fleming’s just-published debut Bond novel, Casino Royale, during their first season.

Since the Climax! version of Casino Royale is only 50 minutes, the plot has obviously been shortened considerably. And yet, if you’ve read the book or, more likely, seen the 2006 movie version that launched Craig’s Bond career, you’ll recognize the basic narrative, even though none of the familiar 007 flourishes are in place. In fact, Nelson doesn’t enjoy “00” status at all — he’s merely identified as a “Combined Intelligence” agent who is tasked with competing head-to-head against the mysterious Le Chiffre (Peter Lorre) in a rousing game of baccarat.

Jeff Watson does some research:

James Bond, the complete list…there are more than you think:

Please list every James Bond on film, TV, and radio. Grok: Alright, here goes-starting with the big-screen Bonds: Sean Connery, George Lazenby, Roger Moore, Timothy Dalton, Pierce Brosnan, Daniel Craig. Then David Niven in the 1967 spoof Casino Royale. On TV, there's Barry Nelson from a 1954 Climax! episode of Casino Royale. Radio Bonds? Bob Holness in a 1956 BBC Casino Royale adaptation, Tom Hiddleston in a 2014 Heart of the Matter series, and Toby Stephens in various BBC radio dramas.

Aug

26

The abysmal Volatility last Monday, 18 August, and the dead stop last Tuesday, EOD, were attributed by some to 0DTE. A little back on Spec List, papers were posted, showing this Volatility suppression effect by 0DTE options and their market makers.

I know it is just the latest holy grail traders flog to. Quite a few websites are offering subscriptions for the data. So, I was surprised to find it for free on Barcharts – the EOD version:

Steve Ellison adds:

Important information, thanks. Jeff Clark said on a podcast that 68% of all S&P 500 option contracts are 0DTE.

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.

Jul

28

Specs have been posting about copper, and I happened across this act of chartcrime.

Steve Ellison comments:

Wow, I don't think the software I used to generate Sankey charts in a previous career analyzing a petabyte-sized data lake to surface key insights for one of the big 3 personal computer companies would have allowed me to just start a new stream in the middle ("Imports of Refined Copper"). Anyway wouldn't it make more sense to join "Concentrate Net Exports" and "Scrap Net Exports" on the right side of the chart, and then put "Imports of Refined Copper" downstream of that junction?

I was using D3 in those days; now that I am much more experienced with Python, maybe I should search for a Sankey charting library in Python.

On the subject of copper, I perceive a macro trend that the US has geopolitical risk because too much domestic mining and basic material production was shut down, partly in order to export environmental impacts to less developed countries. Lithium and steel are in similar situations.

Peter Ringel writes:

"Sankey" that is a nice search term. I had it on my list to research. These guys use it a lot..

One finds several sankey libraries in Python on Github, such as this one.

Jul

21

CPI Data Quality Declining
June 20, 2025
Torsten Sløk
Apollo Chief Economist

To calculate CPI inflation, BLS teams collect about 90,000 price quotes every month covering 200 different item categories, and there are several hundred field collectors active across 75 urban areas.

When data is not available, BLS staff typically develop estimates for approximately 10% of the cells in the CPI calculation. However, in May, the share of data in the CPI that is estimated increased to 30%, see chart below.

In other words, almost a third of the prices going into the CPI at the moment are guesses based on other data collections in the CPI.

Bill Rafter writes:

Would anyone in the data business be surprised by this? I’m not.

Peter Ringel wonders:

Doge related?

Big Al offers:

US Labor Department reducing CPI collection sample amid hiring freeze
By Reuters
June 4, 2025

The U.S. Labor Department's economic statistics arm said on Wednesday it was reducing the Consumer Price Index collection sample in areas across the country due to resource constraints, but the move should have "minimal impact" on the overall CPI data.

Jun

26

Adam Grimes comments:

Cool chart. Interesting data. We have some farmers in the family but I would not have expected such a big difference.

Peter Ringel writes:

I think, this productivity boost shows Norman Borlaug‘s Green Revolution. There would be no India or China as we know it . And in the West too. The topic seems close to not being politically correct in our upside-down world.

Michael Ott brings expertise:

The Y axis is Mg/hectare, which is a different way to measure weight per unit area. Technically, a bushel is a unit of volume (8 gallons) that is understood to be equivalent to 56 pounds of corn or 60 pounds of soybeans. Most US farmers measure in bushels per acre, which is a different way to express weight per unit area.

The major increase in corn came from breeding AND fertilization. GMO corn was introduced in 1996 and reached 50% market share around 2001, which is pretty fast adoption for agriculture. Biotech traits certainly help with yield, but more so prevent disasters from insects and weeds, which harm yields.

Big Al finds another chart interesting:

Jun

18

What exactly means this quote? I read of it years ago on a book about Medallion Fund but never understood if I got the meaning correctly.

We're right 50.75% of the time…but we're 100 % right 50.75% of the time. You can make billions that way.

- Robert Mercer

Peter Ringel responds:

my guess: trend following systems can have 40% win rate and lower. Yet via expectancy these sys can be very profitable. Medallion though, would do HF stuff, less MoMo.

Michael Chekalin comments:

Mercer refers to the consistency of Medallion. In other words, they are “consistently” profitable in the 50% area, which through proper money management, risk/reward, etc, can be extremely profitable.

Asindu Drileba writes:

I think its a reference to the "law of large numbers." Suppose you noticed the market goes up 51% of the time on Thursday. (for the 100 Thursdays in your sample dataset) This means that you will also loose 49% of the time. If you decide for example to only place bets for the first 20 days, you might have a win rate of 0%. All bets of the first 20 days can fail.

But the model will still be correct since you can make money for the subsequent 51 days and the lose money for the next 29 days — thus playing the market for all the 100 days (20 + 51 + 29). So your win rate will converge to 51/100 which is the same 51% you identified in your sample. You have therefore acquired 100% of the edge. I think that is what he means when he says "we are 100% right 50.75% of the time."

Nils Poertner adds:

Some specs have a 10pc win rate and do really well. Friend of mine was early investor in ETH in size- but all other of his ideas didn't work out. His nick name was "Harbinger of Failure." Kind of like the joke: "I told my friends I want to become a comedian - and they all laughed. And then I became a comedian and no-one laughed anymore." I often think about him now.

May

15

I went to China recently. What I saw and nearly all the people I talked to were not happy about the economic situation there and almost everyone thinks Xi is stupid.

Humbert A. responds:

This has been the status quo since pre-Covid times imo.

David Lillienfeld writes:

Peter Drucker observed that the problem with totalitarian regimes is that with only one person in charge and no one in a position to offer alternatives/challenge that individual, there is no means of identifying and developing managerial talent in a society and the society inherently slows until the person in charge dies and there is a contest/market for new leadership. There will be problems showing in China soon enough–it has a demographic hurdle coming and it shows no signs of having any idea how to deal with it. It has lots of domestic health issues that will likely cost it considerably within the next decade. Maybe Xi will demonstrate Drucker as being wrong, but I doubt it. Barely three decades ago, the concern in the US was that Japan was about to walk all over the US. It didn't. I'm not sure that China is going to do any better.

Asindu Drileba writes:

This is my exact suspicion.
1950s to Soviet collapse — US Vs Russia (Narrative is Russians will take over USA)
1980s to Asia Currency Crisis — USA Vs Japan (Narrative is Japan will take over USA)
Early 2000s to Present — USA Vs China (Narrative is China will take over USA)

Peter Ringel adds:

There is a perverse stickiness to it. I grew up in one of these shit-holes ( not Japan ! ) - East Germany in my case. All the models and all the data point to implosion. And then it takes decades and centuries and more. And finally, when it collapses everyone is surprised, and no one was expecting it.

Mar

29

On his blog:

TraderFeed
Exploiting the edge from historical market patterns
Sunday, March 23, 2025
Keys to Great Trading

Peter Ringel adds:

He was also on CWT recently:

Trade Like You: Why Playing to Your Strengths Works Better · Dr. Brett Steenbarger

Mar

15

Maybe the most fundamental thread on Spec List has been counting/data/figuring things out, so here is a marvelous two-part video by 3Blue1Brown, with Terrence Tao, about how we determined various cosmic distances.

The Cosmic Distance Ladder, Part 1

The Cosmic Distance Ladder, Part 2

Additional commentary and corrections from Prof Tau

Gyve Bones writes:

This was a fascinating lunch lecture. Thank you. I first became fascinated with the story of how science and technology developed with the 1977 PBS series by James Burke "Connections" which told the story, without the aid of CGI graphics in my high school years. I was given the companion book for the series that Christmas by my very thoughtful mom. (It's also the story that launched my falling away from the Catholic faith in which I was raised, my teenage rebellion.)

Here's the episode which details how the Babylonian star tables by Ptolemy used by Copernicus were preserved from the destruction of the Library of Alexandria, found on papyrus scrolls in a cave backup library:

James Burke Connections, Ep. 2 "Death in the Morning"

Asindu Drileba responds:

Connections is so good. I really wish there was a remastered version (in HD at least). One of the things I still don't understand is how government funded broadcast corporations like PBS, BBC and DW make such high quality non-fiction films. I would go to say the have the best non-fiction documentaries. Capitalism doesn't apparently do well when it comes to making non-fiction. What makes them so good? Are they just structured properly?

Gyve Bones replies:

Here is a very well mastered set of the videos for Connections (1978).

Peter Ringel adds:

there is a Conjecture, that astronomers are the more happy and humble people. I guess, this is because, it is all so vast and relative.

Mar

11

I think a lot about how attention, like a searchlight, moves around the markets. I like, too, the simple logic that when retail investors are deciding what to buy, they have a huge array of choices, but when deciding what to sell, they are limited to what they own. (Leaving out the idea of looking at thousands of options to try to decide what to short.) Maybe index ETFs simplify this process, but then, before index ETFs we had mutual funds, so maybe not.

All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors
Brad M. Barber, Graduate School of Management, University of California, Davis
Terrance Odean, Haas School of Business, University of California, Berkeley
Advance Access publication December 24, 2007

We test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one-day returns. Attention-driven buying results from the difficulty that investors have searching the thousands of stocks they can potentially buy. Individual investors do not face the same search problem when selling because they tend to sell only stocks they already own. We hypothesize that many investors consider purchasing only stocks that have first caught their attention. Thus, preferences determine choices after attention has determined the choice set.

Asindu Drileba writes:

Laslo Barabasi has a model called preferential attachment. His model can simply be defined as "people usually prefer to bet on a horse that is already winning". I hear night club promoters also do this. To pull in customers, you create artificially fake long lines. These long lines make a night club appear popular, and thus make people interested in going in.

For the S&P index for example, index rebalancing algorithms are at times market cap weighted. That is, stocks with a larger cap, get more money than those with smaller market caps. Which will increase their future allocations, as their market caps grow. Retailers and others seeking "Blue chips" cannot invest in the top 500 stocks. They may focus on the top 20, which further distorts the market caps. Barabasi claims that this is partly why stock market caps have a pareto-like distribution. 20% for stocks may hold 80% of the index value market cap. (I am not saying this so what is exhibited it's just an illustration).

Peter Ringel comments:

I hear night club promoters also do this. To pull in customers, you create artificially fake long lines. These long lines make a night club appear popular, and thus make people interested in going in.

This is one of the many cognitive biases of humans. Any group over 5 attracts attention by by-passers. It even works with cutouts of >5 humans. The research papers above immediately bring my thoughts to manipulation. The searchlight is a daily reality in markets to me. But someone is holding it and is pointing it. Wyckoff style manipulation games on and on. For hundred years. I do disagree a little with the paper about retail trader as the main victim. Institutional smart money today - in one corner of the market - is tomorrows dump money in another corner. They are easily also susceptible to the manipulation games.

Feb

19

We sent my 2025 annual forecast to the Copyright office. They would not copyright it saying, “it was AI generated so could not be copyrighted.” We replied it was not AI, showing why so were finally approved. This raises an unraised question about AI protection. What is/will be the law??

Asindu Drileba comments:

The purpose of AI regulation is just so the big players can build a cartel and lock in the market. This is why people like Sam Altman say they "welcome it".

Big Al gets conspiratorial:

Not to be too conspiratorial, but…

OpenAI whistleblower found dead at 26 in San Francisco apartment

A former OpenAI employee, Suchir Balaji, was recently found dead in his San Francisco apartment, according to the San Francisco Office of the Chief Medical Examiner. In October, the 26-year-old AI researcher raised concerns about OpenAI breaking copyright law when he was interviewed by The New York Times.

Peter Ringel writes:

I always suspected, that the senator is a robot. His performance is inhuman!

Your work is obviously your work. But, what if one uses AI for ones work, creations and everything? It should be still your IP. We have musicians on this list, who use AI for inspirations and research. I constantly lookup code via AI, b/c I am not a good coder. But the final script is mine. I even run AI models locally. The opensource models like Facebook's LAMA. (for an easy install, i can recommend: msty.app)

There is creativity in asking questions, to squeeze the right results out of AI. Prompt engineering is a thing.

Pamela Van Giessen prompts:

No doubt every single publishers’ lawyers are fighting the ability for AI generated anything to be copyrighted because so much AI is taking from existing copyrighted works, usually without permission or payment. Some publishers are feeding into AI programs with permission/payment (I think my previous employer, Wiley, is feeding at least some content into AI, for instance). This is a lousy deal for the authors and artists. The publishers will make vast sums, much like Spotify, and the content creators (I really hate that phrase) will get less than pennies on the dollar.

Liberals have done a great job of deflecting the real problem with platforms (omg, no content moderation or fact checking, TikTok is spying on Americans, the world will end!). The real problem with platforms is that they steal content, outright theft. And where is your government protecting you from this theft? NOWHERE.

Easan Katir relates:

I sent an unpublished manuscript to an Oxford-educated editor, asking her to edit. She asked if any of it was AI. I replied truthfully that I wrote most of it but I asked AI to add some. She declined the job, I guess making a stand: humans vs. AI. Fortunately or not, we know which is going to win.

Peter Ringel offers:

U.S. Copyright Office says AI generated content can be copyrighted — if a human contributes to or edits it

Pamela Van Giessen comments:

I imagine that the courts are going to get involved at some point. Since much AI is from existing copyrighted material, some (most?) used without permission, someone is going to challenge copyrighted AI that is really someone else’s material.

Jordan Low agrees:

precisely. i have been seeing a lot of content creators complain that their work is just automatically reworded into another article without attribution.

Update: Big Al offers an historical lagniappe:

The battle of Cúl Dreimhne (also known as the Battle of the Book) took place in the 6th century in the túath of Cairbre Drom Cliabh (now County Sligo) in northwest Ireland. The exact date for the battle varies from 555 AD to 561 AD. 560 AD is regarded as the most likely by modern scholars. The battle is notable for being possibly one of the earliest conflicts over copyright in the world.

Stefan Jovanovich writes:

The first written mention of the Battle of the Book occurs in the Life of Saint Columba composed by Manus O'Donnell in 1532. Britain did not have a formal copyright law until the passage of the Statute of Anne in 1710; that gave authors their first ownership claim to their writings. Until then the Stationers' Company had an exclusive right to all printing and publishing in Britain. The term "copyright" comes from the right a member of the Stationers' Company had to copy a written manuscript into print after the text had been registered with the Stationers' Company. The charter for the Stationers' Company was granted in 1557 by Queen Mary and King Philip, then confirmed in 1559 by Queen Elizabeth. The Company had the authority to seize "offending books".

Carder Dimitroff adds:

From March's Library: Early printed books were customized with hand-painted illumination for the wealthy.

Oct

5

Larry Williams comments:

Yield curve is very bullish at this time - it is so misunderstood.

Peter Ringel does some counting:

I found a FED Cut gives some bear pressure on SPY 5, 10 days after. Then it goes into meaningless regarding SPY.

only T+5 , T+10 are probably significant. We just crossed the end of that bearish pressure.

T+1 10000 reshuffled - Observed difference: -0.03, Bootstrap p-value: 0.8573
T+5 10000 reshuffled - Observed difference: -0.96, Bootstrap p-value: 0.0206
T+10 10000 reshuffled - Observed difference: -1.13, Bootstrap p-value: 0.0514
T+20 10000 reshuffled - Observed difference: -0.88, Bootstrap p-value: 0.2829

(a work in progress)

Oct

2

Anyone else sick of the idea that gamblers are best at financial markets? Why aren't the champion players the richest in the world? Would you hire a gambler to manage your life savings? Don't gamblers (Livermore, etc) die broke?

Why This Wall Street Firm Wants Its Traders to Play Poker

Young traders who join the trading giant Susquehanna International spend at least 100 hours playing cards during a 10-week training program. When the stock market closes at 4 p.m., they often head straight from the trading floor to a dedicated poker room at the firm’s headquarters in the Philadelphia suburbs.

Jeff Yass, Susquehanna’s co-founder, sometimes joins in, scrutinizing hands new hires play and gauging how effectively they bluff. Thousands of employees, from traders to technologists, participate in the firm’s annual poker tournament. At least three have notched wins at the World Series of Poker in Las Vegas.

Big Al offers:

Trading Is a Lot Like Poker

Peter Ringel writes:

I agree to all the points from the trading side. I know the basics of poker, but not a skilled player. Not even a novice. It makes sense to use the filter "skilled poker player" for manager selection. But how to become a skilled player ? Is it easier to become skilled in poker vs a skilled trader? I suspect it is a similar hard battle.

Asindu Drileba comments:

The problem with "skill level" is that they kind of translate differently. Warren Buffet for example is a Bridge addict. (Bridge is also a game of chance like poker) He (Buffet) is definitely an "above average skill player", but nit amongst the top 20 in the world. In investing however, Buffet may be regarded as part of the top 5.

The same goes for other financiers. Sam Altman (top VC in Silicon Valley), Jason Calcanis (Top VC in Silicon Valley), Charlie Munger were probably above average poker players but their edges were stronger in the finance & investing world — but all these attribute poker to their success.

Big Al writes:

1. Poker is very different from other casino games. There is a lot of skill involved, a lot of math (at the higher levels), a deep understanding of game theory (at the very high levels), and there are many more decisions to be made in poker compared to, say, roulette. Most poker pros probably wouldn't call poker "gambling", though some are degen gamblers when they walk away from the poker table.

2. Poker is a lot like the other casino games in that, for most people, the best decision is not to play. Like in markets, where the best decision for most is not to trade but just buy a diversified portfolio and hold it for a long time.

3. But firms like Susquehanna are not advising "most people" and they're not buying and holding SPY. For them, poker is a good way to assess and develop various skills that are relevant to hacking the market and making big bets. Poker is a great laboratory for testing "risk tolerance".

4. The poker "ecosystem" is a lot like the trading market in that there is a need to keep getting new suckers to enter at the bottom level and convince them they can win.

Sep

30

Interesting, for the history of market prognostication:

Part 1

On May 27, 1981, Joseph Granville addressed a standing-room-only audience in the Science Lecture Hall at the University of California, Irvine campus. The event was sponsored by the Graduate School of Management and I served as the Master of Ceremonies.

In the first hour Joseph Granville was supposed to explain his theories to us. The hour proved entertaining with many anecdotes and stories, but the theories were not explained.

Part 2

Part 3

Peter Ringel offers:

You guys probably already found his interview on CWT:

EP 109: The man who beat the dealer, and later, beat the market – Edward Thorp

The man gamed Casino Roulette on a mechanical level and was probably targeted by the mafia back then.

Jul

27

Here's a performance of a one-movement sonata for flute and piano I wrote a few years ago.

Traditionally, sonatas were three or four movements. My goal here was to respect that structure, but to do so in a highly compressed format. The piece is built around a recurring pattern (an ostinato) that the flute first "discovers" before it lands in the bass of the piano. The middle section begins with a nod to a more primitive, primal flute. Again, a pattern is discovered that is worked and reworked in counterpoint between the instruments. This little sonata is a pretty solid reflection of my musical aesthetic: I'm striving for a whole that makes sense, but also exploring some extremes.

What I think might be interesting to the group is that some elements of this piece were generated from financial market data. (Think of a GARCH-type process.) Aspects of volatility were allowed to dictate some elements of harmonic density and texture in the piece. I bent this to my overall musical concept as opposed to leaving it bare. (I don't find much engaging in process-driven compositions… they are far more interesting to write and maybe to talk about then to hear, in most cases.)

Sushil Rungta appreciates:

Very much enjoyed it. It was marvelous. Thanks for sharing.

Peter Ringel responds:

Beautiful. TY Adam.

some elements of this piece were generated from financial market data. (Think of a GARCH-type process.)

This seems brilliant. I have no doubt that volatility is deeply human. Sadly, my ear is too poorly trained to understand your translation of this into composition.

Somewhat related: I use order-flow audible sounds during my day-trading. Like the old guys used floor noise. There is a non-regular rhythm to it. For me it is so ingrained now, I feel naked without it. It also helps with not needing to stare at the screen all the time. The Mkt- music will alert me if necessary.

[ Lagniappe: Sonata, pl. sonate; from Latin and Italian: sonare [archaic Italian; replaced in the modern language by suonare], "to sound"), in music, literally means a piece played as opposed to a cantata (Latin and Italian cantare, "to sing"), a piece sung. -Ed ]

Jun

23

Queued up to the start of the actual interview:

An Education from a Speculator: Interview with Legendary Victor Niederhoffer

Laurel Kenner approves:

One of the best interviews of the Chair. —The Collab

Bo Keely writes:

i like it, a fine reacquaintance.

Peter Ringel responds:

Thank you, watching it now. I also want to highlight the recent mkt calls on Twitter, which worked nicely. This and the wonderful articles about MFM Osborne.

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?

May

10

Same-Weekday Momentum
Zhi Da, University of Notre Dame - Mendoza College of Business
Xiao Zhang, University of Maryland - Robert H. Smith School of Business
Apr 24, 2024

A disproportionately large fraction (70%) of stock momentum reflects return continuation on the same weekday (e.g., Mondays to Mondays), or the same-weekday momentum. Even accounting for partial reversals in other weekdays, the same-weekday momentum still contributes to a significant fraction (20% to 60%) of the momentum effect. This pattern is robust to different size filters, weighing schemes, time periods, and sample cuts. The same-weekday momentum is hard to square with traditional momentum theories based on investor mis-reaction. Instead, we provide direct and novel evidence that links it to within-week seasonality and persistence in institutional trading. Overall, our findings highlight institutional trading as an important driver of the stock momentum.

Peter Ringel writes:

I find this a sexy area of research. It also effects the indices. My guess is some sort of behavioral bias among large players plus some technical constraints, how they have to enter complex trades. Why is a certain fund buying the sector every Tuesday at 10:30? I see such regularities pop up, exist for a while - and vanish again.

Big Al does some counting:

Here is a quick, simple study just to kick this can. This is looking at NVDA, days of the week, for about the last year. The z scores show Wednesday being a significantly poor day and Thursday being good (but with a big sd).

I also did a thousand sim runs, resorting the % changes randomly, and pulled out the max-min spread for each sim run. For the actual data, the range is 1.86% points (Thursday mean minus Wednesday mean). Only 2.08% of the sim runs had a wider range. Taking that to a z score table gives the actual range a score of +2.03.

However, here is the correlation for each weekday predicting the next trading day that is the same weekday:

NVDA correlations, weekday to next instance
Mon-Mon 0.06
Tues-Tues 0.04
Wed-Wed 0.03
Thurs-Thurs 0.09
Fri-Fri 0.01

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.

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

12

i reviewed the Livermore book for Barron's and i believe if covers the bad quite well.

History Lessons for Investors
Reviewed by Victor Niederhoffer

Imagine that master novelist and chess aficionado Vladimir Nabokov wrote a fictional memoir about Capablanca—the 1920s world champion who never made a mistake on the board—and that Bobby Fisher then published an updated and annotated version, incorporating all of the important developments of modern chess strategy, along with a foreword by Anatoly Karpov.

A similar multilayered feast on investment is now available, with minor differences. Edwin Lefevre's Reminiscences of a Stock Operator is a novel told in the first person by a character inspired by legendary trader Jesse Livermore. This classic is now graced with extensive annotations by investment advisor Jon Markman and a foreword by hedge-fund manager Paul Tudor Jones.

The result is big and beautiful, cutting across two centuries of booms and busts and market and economic history, with a myriad of vintage historical photos and instructive historical charts throughout.

Peter Ringel responds:

Thank you, Vic. For many traders, Reminiscences was their first book about speculation.

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

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

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

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.

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

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.

Sep

18

remember the hype about Chat GPT some weeks /months ago? def for trading /investing - I doubt using that or any other program will help to master time ahead - prob a recipe for disaster at the end.

Peter Ringel writes:

I am still hyped! Hyped for boost in efficiency of the economy via AI. Not hyped for AI-trading systems! So far the training data set seem too small for AI - trading, thankfully. Together with what the Senator and others posted here: humans still beat skynet. Yet, I like to remind myself every day: the bastards are coming.

Hernan Avella responds:

So far the training data set seem too small for AI - trading , thankfully.

How do you figure this? Each trading day probably produces more than 100's million rows between trades and quote updates for all levels and exchanges, if you include futures, equities. I don't think lack of data is the issue here.

Peter Ringel replies:

I know even less about AI-coding, than about trading-coding. So everything is based on perceived experts. Thankfully, so far they are pessimistic.

Hernan Avella continues:

So everything is based on perceived experts.

The set of experts in ML-DL is very small, and the set of experts in trading is also small. I imagine the intersection is even smaller and more importantly, secretive. My suspicion is that the training set is more than enough, but the problem of ergodicity and stationarity (lack of) of the ever evolving competition are the culprit.

Peter Ringel responds:

I hope, you are wrong with this. But at some point you will be not. I speculate, that the "small" existing universe of trading history data + some sort of data - > model on human psychology - will be enough - will make us traders obsolete.

Peter Saint-Andre writes:

In my limited, non-trading experience with LLMs, I've found that their output reflects conventional wisdom. That might leave plenty of room for creative strategies outside the mainstream.

Peter Ringel agrees:

yes, they are regression x1000 on speed. so far feedback loops/ "reflexivity" kill it. As far as I understand.

Hernan Avella warns:

I would abstain from making any statements about the state of the art ML applied to trading, specially from a place of ignorance. Whoever works in this field (which there are only a handful in this list), and interacts with just the basic chat GPT 4.0, realizes immediately the productivity boost and immense potential to improve one's process. Only a moron would expect a good output from just feeding prices to the engine or asking simple questions.

Peter Ringel agrees again:

nooo! especially if you are ignorant in a field , better check if that poses a risk to your systems. I believe AI is a risk to traders. Here is a fact already reality: ChatGPT empowers people to do substantial back-tests.

Big Al adds:

And doing backtests poorly, or being improperly overconfident in backtests, is a threat to one's trading.

Humbert K. wonders:

With reference to the skynet, it is hard to guess if and when fully autonomous weapons will happen. My 2 cents is: Fully autonomous weapons will happen. There are debates as to whether we should let machines make kill decisions. I can say though our adversaries' weapons developments will not be bound in any way by any moral or ethical standards. If the bots can communicate with each other and collaborate to perform. When will they no longer need human inputs or interventions?

Eric Lindell writes:

There's a limit to what computers can do with the massive amounts of data available in countless categories. To find the perfect mix of factors to plug into a formula — if there is such a thing — would require a number of operations that increases exponentially with the data-set size.

Humans are good at intuitively navigating such complex search spaces. Computers using brute force just aren't powerful enough yet — and may (in principle) never be. That said, if a human comes up with a plausible conjecture relating stock picks with subsequent price performance, computers can certainly back-check the theory.

I'm working on one now regarding immediate post-IPO performance of stocks selected by certain criteria — criteria that aren't widely (or even narrowly) recognized for their relevance — pertaining to historical research of a revisionist nature.

Sep

6

Do markets lead recessions or do recessions cause markets to drop? I think Larry had a chart on this. Consumer is going to be spending less on discretionary spending. Retailers have already warned us of this.

- Student loan payments are due starting September
- Savings rates are down
- Employment situation is weakening a bit
- Consumer credit is slowing
- Interest payments rates are up on credit cards, cars, homes, etc.

Jeffrey Hirsch responds:

We had our U.S. recession on 2022 with back to back negative quarters of GDP Q1-Q2 2022. "They" changes the rules during Covid. Generally, markets lead recessions. This last time they ran concurrently.

Larry Williams comments:

No recession in sight with the indicators I keep…

Yelena Sennett asks:

thank you Larry, in sight means a few months or so? or a few quarters?

Larry Williams answers:

A year or so I would say.

Hernan Avella writes:

When was the last time the yield curve inversion (with the specific configuration by Campbell Harvey at Duke) didn't precede a recession in the out of sample period? It's a 8 out of 8 record I believe. While one would be foolish to act solely on this, this might be the best of all the bad recession indicators we have. Especially because it was conceived in 1986, has some rationale and we are experiencing the out of sample, Unlike Larry's drawings that are constantly overfitted to the data.

Larry Williams responds:

Me overfit data? Try my best not to but you Y-curvers refuse to acknowledge times of negative curve and massive stock rallies. Here is just one DJIA in red:

Hernan Avella replies:

But Larry, kindly stop straw-manning. The gist of the yc indicator, is the out of sample track record of preceding 8 out of the last 8 recessions. There's no controversy about this. Nobody serious has related this to stock returns. So you are trying to disprove a point that nobody is making.

Larry Williams writes:

Two points: (1) To say the curve has accurately predicted recessions you have to acknowledge it as often lead by 2 years. Wowsa!! Now there’s a real helpful tool. Gee those negative readings are not so precise. but maybe you are happy with that I am not. especially when there are so many better tools. (2) And if the YC and recessions don’t mean much to stocks, why would I care?

Hernan Avella responds:

Who said “predicted”. You keep making stuff up!. I can’t find the source, but the lag for the indicator is 12 or 18 months after 2 consecutive quarters of inversion of 3m-10y. Ignore it if you want. Just don’t straw-man the thing.

Larry Williams responds:

No straw man here—just look a the data its very poor indication recession is coming. now what did I make up???????

Hernan Avella states:

I don’t get it. 8 out of 8 within 18 months after 2 consecutive quarters of inversion….it could be luck, but let it at least fail once. Go to the source: Harvey’s 86’ dissertation.

Larry Williams says:

Curve went negative last April. you are the end of the time zone…better get ready for the sky to fall!

Michael Brush writes:

Yardeni charts yield curve inversion against stock returns. It has a good record but not quite as good as forecasting recessions. Agree no recession in sight.

Gary Phillips writes:

Not every yield curve inversion has been followed by a recession; however, every recession has been preceded by a yield curve inversion.

Larry Williams replies:

Agree but with a massive lead time. I want/need more precise timing and then—its not always market relevant.

Gary Phillips responds:

The clock doesn’t start ticking from the inception of the inversion, rather than when the curve begins to re-steepen.

Larry Williams offers:

Sure just like this:

Yelena Sennett writes:

Thank you for sharing your graphs and your concise points. “And if the YC and recessions don’t mean much to stocks why would I care?” Indeed, YC and recessions don’t seem to be very helpful or timely tools.

Peter Ringel comments:

highly subjective: the last break since July did not felt overly bearish. Low volume , a little deeper than I would like yes, but no gusto. Maybe a big range is developing, but more likely the drift kicks in and carries us higher. The AI - story is alive.

H. Humbert adds:

I agree with Larry that this time the YC inversion will not have forecasted a recession. It usually sparks a credit crisis which then causes recession, the normal procession of events. This time it seems to have only sparked the mini bank crisis which seems to have wound down. Of course we do not know if there will be another crisis that gets sparked. But so far, no, and to Larry’s point it has been quite some time now.

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

Aug

4

A.I. Researchers Are Making More Than $1 Million, Even at a Nonprofit

Peter Ringel comments:

good for them! Everyone now rushes into this research because of the hype. Of course, the top-level AI experts can sell themselves at a premium. But overall, costs for non-AI IT development should come down. One reads, coders boost their productivity via GPT, Codepilot and the other tools by 10x. I use the simple GPT for coding daily and easily believe this. It is very useful for the hobby coder.

Laurence Glazier writes:

I'm using GPT 4 every day as a companion while composing. A source of detailed knowledge on composing practice and orchestration.

Peter Ringel responds:

wow, for music/composing too? Stephen Wolfram offered a fitting definition: "at a minimum LLM like GPT provide the next generation of user interface" (paraphrased).

Laurence Glazier replies:

Of course it can't compose in the sense of the transcendent experience, but it can help in background historical information, e.g. today based on discussion with it I moved material from the first to the third movement of my new symphony. I might have made that decision anyway but it is a huge boost to have access to the AI's wealth of knowledge and apparent understanding.

H. Humbert adds:

Depending on what you want it to do, it could fabricate an answer that is downright incorrect. There have been multiple occasions in my experience that it makes craps up, and craps don't exist in real world. Per this research, its accuracy is getting way worse.

Oct

19

Election Thoughts

October 19, 2020 | Leave a Comment

Peter Ringel  writes: 

love all of these relative strength thoughts / models.

The market is much stronger than the seasonal pattern

Thus the next seasonal low should springboard a better than usual rally

If trump wins expect larger rally than if biden carries the day (better rallies when party stays in power, thanks JH)

That’s my strategy

I don't known what drove this rally, but I assume election uncertainty is bearish. Since the mkt is not - we have a monster driver in here.

There's a humongous fungus amungus!

 … disprove my fear of a  media/swamp

Wait ! there is any doubt left ? :)

K. K. Law  writes: 

Don't know for sure, but the recent bull trend could correlate with the potential Trump November win. Will see if it will take out the Aug/Sept highs. If it forms a double top and reverses, that would be a different story.

Sep

15

From Chinese Netizens

September 15, 2020 | Leave a Comment

Leo Jia writes: 

They teach us to be patriotic, to follow the leader to study communism, sing communist song, and swear by the communist sign.  But did you know, the author of communism was a German, the composer of the communist song was a French, and the creators of the communist sign were Russians?  Did you also know, while teaching us to be patriotic and communists, they deposit their huge amount of money in Switzerland, send their wives, lovers, and children to America, and buy houses in Canada and Australia?

Peter Ringel writes: 

Its good to be patriotic.

The dirty little switcheroo the China gov does (and similar regimes have also done in history) , is to link patriotism to communism and the party.

Obliviously China's culture is millennia older than Marx and his intellectually confused followers.

You hinted at the hypocrisy. Did you know that Marx traded and failed doing so ?  Growing up in the east-block and learning about this fact late - I got an erection :) ! Of course the bastard did .

Aug

18

Recessions

August 18, 2020 | Leave a Comment

 Ralph Vince writes: 

I went to look at past recessions beginning with the one that officially started in Aug '1929. I looked that the number of months, the recession officially lasted for what the highest teh unemployment rate got up to was, what the lowest GDP dropped during  it, and the drop in the DJIA. there were 14 official recessions in this period (Iam not counting the current recession we are in).Interestingly, the correlation between the depth of the unemployment  rate and the number of months the recessions lasted for was .8438. I  other words, the deeper the unemployment rate, the longer the recession lasted for to a very high correlation.

The depth ofGDP drop too was highly correlated to the months the recessoin lasted to a correlation of .75.Every recession saw  market drop-off of varrying degrees with the least being -5.727% from fb to october 1945, the worst -89.19% from  Aug 1929–Mar 1933 Of the 14 recessions, 10 saw market drops >20%, and 4 of those saw drops >45 %.

So I would expect this recession to last a long tim based on unemployment and GDP so-far. However, even though all recessions saw a market drop, th severity of the market drop and the length of months the recession lasted was only +.03. The other factors that correlated to market drop during recessions was depth of unemployment rate correlating positively by .12 to depth of market  correction, and depth of GDP drop correlating positively to market drop by .35. 

Peter Ringel writes: 

Damn Ralph!  Incredible call today.

Ralph Vince  writes: 

No but I thought it would be on much havier volume., 111/2 tims what we saw today.

Hernan Avella writes: 

maybe with more volume we get to 2150 by labor day, as you vehemently forecasted

Apr

30

Does anyone know if anywhere else in the world hospitals/ICUs were overrun?

After China, Italy, (Iran?), NYC?

I just checked South Africa: it seems not as severe as Italy.

Why aren't where any other extreme hot-spots?

Is it possible that the virus mutates itself to extinction? After the first jump from animals to human-quite deadly, each followup infection/generation gets less and less severe?

Denise Shull writes: 

It would appear Mexico City is over-capacity per Bloomberg.

Ralph Vince writes: 

The damage to thee economy, long-term, is immeasurable.

Who is going to go it there, borrow to their nose and beyond , risk everything, to create something now? Who, given the heavy boot of government at all levels, the precedent that has been set, all based on a comic book hoax?

Only this who have NEVER been in that situation, think the economy will just "reopen" and life go back to normal.

There is no engine now. 

Jim Sogi writes: 

Worse than the permanent damage to the economy is our loss of freedom. What good is all the money, nice house if you don't have freedom, freedom to travel.

We lost a lot after 911, but this feels more like a dictatorship by local governors and mayors.

Dylan Distasio writes:

If it's inflicted much longer, especially with weather warming up, and the economic hardships, people are going to openly ignore the mandates. It's already starting.

Apr

19

I have some questions regarding eurodollars and attempted to answer them myself: Why is GE quoted as interest rates, but de facto acts like a commodity ? Why were GE quotes up (rates on eurodollar deposits down) during the 2008/2020 crises. There was lots of cash demand.

- GE futures prices DO show de facto demand for cash (any fx cash offshore demand)
- GE is priced as rate to par of deposits
- GE reacts to or anticipates FED rates, as FED reacts to cash demand
- the rate of the deposits are not directly driven by supply and demand of global cash, but are driven by "external"/ non-eurodollar-mkt interest rates
- GE quotes can not be understand by the internal supply and demand of the eurodollar mkt conclusion: even GE-quotes are interest rates, GE-quotes act de facto like commodity prices, e.g. currently show huge cash demand.

Does you agree with my answers?

Mar

12

Don't know the medical edge of this, but the economic one may best be measured each Thursday morning in the weekly new unemployment claims #s, which should help separate truth from bs in the economic effects with timely, relevant data.

Peter Ringel writes: 

Yes, the first real-time data of the economy under the virus/under quarantines–everything else is too full of emotions (including equities).

Yesterday the market felt more rational for the first time, even during down-legs.

Gary Phillips writes: 

Indeed, Peter. It's rational in the sense that the panic and deleveraging is probably over with and the market has become very mechanical. That is, with VIX continuing to remain above 50, options are too expensive to roll, so every time they get in-the-money, they're monetized and we get these violent squeezes. And of course, these rallies are sold into, perpetuating the feedback loop. And, will continue to be sold, until VIX resets lower. So, I don't know if the market is out-of-the -woods quite yet, but it is getting close to where a rally will be sustainable. Perhaps, we hold the current low; but imo, the market will provide one with another chance, sometime between now and opex. If we take out the current low, we could see 2535. However, that would only add fuel to the upcoming rally as the embedded options shorts are joined by new shorts deep-in-the hole. In any case, expected value is to the upside.

anonymous writes: 

The deleveraging is not over from the panic, it is over because individuals and business are going to drawdown their lines of credit fully to make sure they can still operate. Look at BA today. Tapped all their lines for 13 billion.

The drawdown at prime brokers will continue for the same reason. No one wants a capital call in this environment. I just had a treasury trader tell me he's seeing +8 tick bid-ask spreads. The street will deliver as the banks do the opposite. Regulatory capital ratios will be adjusted/waived there.

There is no liquidity. No liquidity, no upside. CB's are going to have to fund a month of negative cash flow….globally.

BTW, watch out for Canada. There's nothing going right there…the place scares me, especially the banks. I've never liked big banks based in small countries.

Gary Phillips writes: 

True, credit markets are not looking well. And, that may be where our next shock emanates from. But vol targeters, CTAs, L/S funds, retail, et al have hit the exits. Models have probably turned short and will be pressed on the next shock down, and when the market turns, they will be racing the others in a massive FOMO rally.

anonymous writes: 

I differ Gary. The street is not short; they have just deleveraged somewhat.

Think of it this way. Pretend for the month of February, every company received nothing in revenue. Zero.

They're likely to do two things, draw on their credit and cut back spending. Smart companies build this into the new amortization schedule; poorly managed companies spend time and resources trying to figure how long it will last (which they have no control over).

In December, I told a company I was advising that this was the perfect wind to sail in and buy a competitor but only if you had the balance sheet to do so. That turned out to be accurate, and it still applies. Just as in 2008, size matters in your cost of funds. Large companies are supported because they are not immediately replaceable.

A few minutes ago, I had a strong discussion with someone. They wanted to use their opportunity in a non-essential endeavor. It is the time to either get customers or buy them. You can't do that with debt or leverage. Robinhood's app is a good example. I consider this early in this cycle, as the strong have not begun to eat the weak, and few weak have acknowledged their position. BA, OXY and a few others have. There's more to come.

What is essential, is for the regulatory capital ratios to be loosened. A dollar of loss removes ten dollars of loans. Mid-tier banks have a bunch of sketchy loans right now (a lot in energy). So watch the OCC, watch the Fed's regulatory game, watch the state regulators. They invent useable capital as much as the Fed creatures liquidity in NYC.

P.S. - many loans and bonds have short time windows starting around 30 days, where they can miss a payment and make it up later without legally defaulting. Unfortunately, I expect that window to close right around quarter end, when banks will have to move them into special assets and reserve against the expected loss (at the same time as they assign a value to the loan for capital ratio purposes).

Mar

8

Allen Gillespie comments on this post from Feb 7th:

Having covered the gaming sector and written posthumously on the death of DARPA's Policy Analysis Market - I could not let this post pass without a more detailed consideration, for a few reasons: First, market structure matters in the predictive accuracy of a market. I also think the death of these projects has resulted in a mentality of more data, is better, so we are going to suck it all in regardless of personal liberties even if we cannot accurately analyze it. I personally think a better study of cross correlation analysis would lead to better and more timely insights without the violations to personal privacy we now experience - that is what I proposed to DARPA but they didn't seem interested.. After this latest Corona Virus - our biology will now be collected as well and full tracking will probably be mandatory. Gotta love Big Brother you know. In addition, certain projects have been pushed into private enterprises then the data repurchased data to get around restrictive laws.

1. Spot markets reflect a market's current discounting of future cashflow for stocks, however, a futures market would reflect the spot market at that future point in time. As a result, they both have predicative abilities but they are focused on different periods of time. This is why many do not understand how to use yield curve data, for example, because it reflects varies leads and lags. Spot data, because it is a discounting mechanism, also reflects futures events - anyone have an idea of the best sector in the 2016 election year or the 2008 election year - what about 200? I will give you a hint, what is good for government is bad for business and what is good for West Virginia may not fly in California both identified, and the low in defense spending dates back a few years. This year, China, biology, guns, HSA, student loan, and work and staying at home related names seem to be the themes - just be aware of the weather cycles. Informational warfare is a different game - as there are lots of potential cross-currents and beneficiaries this year - its the Strike You Know - how do you clear a street of protesters? Who says rates should be zero and we should not have sent manufacturing overseas? Who went on strike? What was the policy on Iran's nuclear program and what was the Stuxnet virus? What is the lab safety record in China? Does containing an outbreak lead to more money and nationalization of the healthcare systems? Many competing vested interests here.

2. Political markets are unique given that markets are designed to balance money to the real odds, but in political markets - every man can independently influence the final outcome through actions outside the market. In short, political markets are more likely to be imbalanced by the Palindrome's reflexive function - as a bettor is not only a bettor but potentially a participant with a single vote - different rule set than the markets. Therefore, the number of bets on a side may be more predictive than the money on a side provided each market participate can vote. This was the problem with the PAM and why after 9/11 certain rules were created - if one has inside knowledge - well then certain activities become self-financing. The insurance claims on the World Trade Center are an interesting financial case.

Victor Niederhoffer writes:

What evidence is there that future markets predict actual future events better than spot prices. This will be relevant now that polls give dems almost an even chance while betting markets are highly in favor of Rep. One expects a deluge of articles from newspapers showing that polls in recent years are just as good as betting markets.

Stefan Jovanovich writes:

The betting markets that are serious because they accept sized wagers–those of the bookies in Britain–are options. That is why you can get a quote on a bet that is clearly going to expire out-of-the-money.

If you use linear polling, the spot and futures prices converge nicely the nearer you get to an election.

"Linear polling" is what I call regular sampling over time of an unchanged initial sample–what the LA Times and the private Trump polls did in 2016. The USC Dornsife poll is my current favorite, and they are–not a surprise!–predicting Trump's re-election.

Peter Ringel writes: 

Whatever threatens the old information monopoly will be attacked.

Oct

18

The chronic need of economic doom topics…

New time series on FRED from the Atlanta FED. (New on FRED. The project is not new.) It is derived via keywords from US/ world newspapers. Methodology. Home. I find the uniformity over long phases fascinating. The Jerry Seinfeld joke come to mind: Isn't it surprising, that newspapers never run out of pages or have blank ones. Whatever happened fits perfectly the space available.

Stefan Jovanovich writes: 

PR's usual cleverness and my coach potato contemplations of this year's World Championship in track and field (this was a glorious year) have me thinking that the steeplechase is a better metaphor for the markets than rock climbing. The worries are repeating hurdles more than they are walls.

Oct

2

What is the significance if any of recent money market stress and Fed actions?

Larry Williams writes: 

If it is a mini QE-4, as I suspect, bullish.

Peter Ringel writes: 

I had decreasing excess commercial bank reserves as bullish factor for equities, because it is an indicator of optimism.

People are less in cash and invest more and more in other assets.

Pete Earle writes: 

A colleague and I wrote an article about this two days back. "This is Not QE4, Yet"

Mr. Isomorphisms writes: 

If it's due to quarterly tax payments, why doesn't this happen every quarter?

Pete Earle replies:

It's not just because of taxes. Read the article.

Aug

15

Watch "Bridgewater's Ray Dalio Discusses the Impact of China's Growth on the World Economy" on YouTube

Watch "Gordon Chang: On Hong Kong Protest, Chinese Economy, Trade War, & Trump's New Tariffs" on YouTube 

Very distinct views. What is yours? Btw, any news on Jim Chanos' latest China results? Seems like he backed out his short earlier?

Stefan Jovanovich writes: 

When Cantillon shorted "France" - i.e. John Law's system, he went to the Bourse in Amsterdam and bought gold with a promise to deliver assignats. The difficulty with shorting "China" is who are your buyers? Cantillon's counter-parties were not AIG fools; they needed Law's paper to pay their French taxes, which could only be done with Law's paper legal tender. But who outside the jurisdiction of the PRC has a need for the delivery of Yuan?

Mr. Chanos' shorts, to the extent he disclosed them publicly, were derivative bets against exporters to China that did not touch the currency at all. Kyle Bass' hints at his short position, which he has closed, involved the exchange between renminbi and the Hong Kong dollar. A question for the List: where, in fact, can a sizable bet be made right now that shorts Chinese legal tender? A bet against the dollar in BitCoin can be laid on in volume but not Yuan. The price CNBC puts on its screens is no more a market quote than the exchange rate for Venezuela's money. Or, have I answered my question already. A purchase of BitCoins in China with the domestic currency would seem to be, for now, as good as selling assignats for future delivery in Holland in 1719. 

Peter Ringel writes: 

Hi Leo, I don't see necessarily a contradiction between the two.

Dalio seems to highlight opportunities in the Chinese private sector. Chang points to the many issues and question marks, that arise from the behavior of the Chinese government.

Anecdotally, I only hear of foreigners exiting China's "physical" sector. I don't know what foreigners are doing in the financial sector in China.

Isn't Dalio concerned about the rule of law? Will he get his money out at some point? I believe Dalio talks a bit to his book and to ears in China. His historical analysis of past global powers, which was also posted on his blog a little back, is aimed in this direction. I do see contradictions mid and long term. With all due respect to China's culture and idiosyncrasies, how can an economic power house and a police state coexist? (Mainly corruption will rip any economy apart).

What do you think the prospects are (in case as an analogy)? The ear on the ground is always the best source.

anonymous writes: 

Hi Peter,

I have been quite negative since a few years ago, and so started long term traveling outside the country since 2015.

I feel quite the same that Dalio was talking to his book and the top ears in the country, and suspect that might be a precondition for him to take his money out now.

His data presentation looks convincing, but it seems dated without considering the country's abrupt shift to the far left in these few years. One may argue that he is looking at a trend on a century level and a few years time can thus be well neglected. Well, people in the West really lacks the experience of what "far left" means. That alone, not to mention about other big issues in the country, will cause a deep and likely long hiccup in the near term, which might well expire everything imagined for the long term.

Larry Williams writes: 

LTTIU

Never forget: the Long Term Trend Is Up…do not fear the future. Fear does not create death. Fear limits life.

Aug

9

We had extreme ranges and drops this week. A couple thoughts… Chair and Rocky argued about percent vs absolute points. Since each point is always $50, points matter most to the wallet. As the absolute value goes up, absolute ranges rise as well.

Questions arise about extreme events: clustering, duration, time between, distributions of returns. Pareto distributions are a key idea according to the book.

Peter Ringel writes: 

From a base of extremely less experience: I think in points. It is more intuitive. The market seems to move in chunks of points. E.g. NQ seems to like 30pts.

Aug

8

I've learned a lot from the DailySpec. Larry's advice that the market rewards patience is good. Ralph's formula for leverage is good. I realize they go hand in hand (their advice). It's hard to have patience when over levered.

Larry Williams writes: 

Leverage is pressure. There is enough of that in this business as is. Why compound it?

Ralph Vince writes: 

This is life and death, and I have NO interest in comfort.

Steve Ellison writes: 

When the game is to shake out the weak, a game plan of being strong, which would preclude excessive leverage, just might work.

I thought the Chair summarized it perfectly in a tweet on Monday:

A typical fri-mon almost identical to the feb 2018 decline with down another 1.5% on Mon nite 1100 pm est and then ready to resume its inevitable bullish climb on tues. anything to force the weak to give their chips to the strong.

Peter Ringel writes:

This is a wonderful tendency. Worked like a charm.

Jul

30

One important thought is that capitalism produces a better citizen (the base for democracy).

In capitalism every entrepreneur is a little king of his house and business.

It creates healthy individual self-confidence. This creates a healthy society.

In contrast, in socialism we find little personal self-confidence.

There self-confidence is replaced by something/a cause to make the little peasant not feel too bad about himself and his fate.

This is the road to Nazism, communism or religious fanaticism.

May

20

Nelson Lichtenstein wrote interesting books about $WMT, noting that Sears was excluded from the initial 1955 Fortune 500 list "simply because it was a retailer".

His "retail revolution" is the transfer of power from manufacturers down the line and closer to the consumer. WMT now significantly controls the supply chain "up" the line.

(Nike and Starbucks have been noted in this regard, but not so far in this book.)

There is a second reason why Burger King management has put the federal Equal Employment Opportunity Commission (EEOC) statement at the very top of the application. Americans consider workplace discrimination on the basis of race and religion and creed un-American. For nearly a third of a century we have had a national debate over the definition of such discrimination and the remedies that are useful and legal to eliminate it. But there is practically no debate about the need to stop it and compensate individuals for it, when discovered.

The overwhelming majority of workers, employers, and politicians believe that the government has a right to insist that active discrimination not take place against anyone covered by Title VII of the 1964 Civil Rights Act or those many statutes that followed in its train. This seems so commonplace and common sensible, that we forget the radical character of this law. If you own a restaurant or a factory or a motel or run a college, you can't make use of your property as you wish. The state mandates you to hire, fire, promote, and otherwise deal with your employees or clients according to a set of rules laid down in Washington and refined by the EEOC and the courts. If litigated, the courts will force an employer to pay real money in compensation and rehire or promote a worker if management is found to have transgressed this new kind of labor law.

Peter Ringel writes: 

Yes, the "point of sale" has the dominant power position.

Like the US has it towards China: US is the point of sale.

Mr. Isomorphisms writes: 

I think this was a point made by Michael Pettis (shows up on twitter.com/jaredwoodard feed) as well.

Stefan Jovanovich writes: 

Some of us are happiest as counter uppunchers. But for I's and PR's wonderful (as always) comments, I would not have spent the first part of the morning rummaging through my books and pestering the wife about her encyclopedic knowledge of employment law. So, I pray these remarks will be taken as merry grumbling, not smart-ass smugness.

1. The EEOC placard is like putting In God We Trust on the Money. It does no harm but it is not proof of anything real. Companies put it up for the same reason water fountains in my birthplace and the nation's capitol once had labels that said colored only; the law made them do it.

2. Labor Union's flourished in the 1930s for the same reason the water fountains had the signs; the Federal law made companies do it. What it did not do, of course, was make the labor unions allow memberships to be open to people regardless of gender and race. On the contrary, those awful capitalist employers had shown a shocking willingness to allow women and Negroes and Mexicans to come to the same workplace. They had, of course, shown the same terrible openness to letting rich black and Creole people in Louisiana ride in the same passenger carriages as white people. In both cases the law put a stop to the dreadful egalitarian idea that anyone could be a source of profit.

3. One should be careful about drawing any inferences from the Fortune List. When Henry Luce ran Time-Life editorial selection had a simple rule: our advertisers are the news. Sears was not a major advertiser in expensive magazines in the 1940s and 1950s. They did not need to be any more than Google (forgive me: Alphabet) needed to buy ads on television in the 1990s and 2000s.
 

May

15

If we imported goods from, say, the Gaza, would that be a good thing?

Peter Ringel responds:

Please allow the kraut to interject:

Hamas bombed Israel with >1200 missiles (and counting) during the last 3 weeks.

Hamas tries to trick Israel into a broad attack because Hamas is losing support in Gaza fast.

Israel showed tremendous restraint so far. Something politically extremely costly during an election year.

It is on the shoulders of the Palestinians to get rid of Hamas. Economic sanctions help with that IMHO.

Then we will see.

Feb

10

Mises wrote in 1940 what it is still difficult to say 80 years later: the "working class" in Germany were the Nazis most dedicated supporters precisely because Hitler offered "full employment" through public spending. Hitler's dilemma in 1939 was that the German central government had no more usable FX with which to pay for its imports. The only means of continuing the supplies from Scandinavia and the Baltic and Romania was to make German IOUs as good as cash in the same way Napoleon persuaded Continental Europe to accept the "reformed" (sic) French currency. The Soviets could not be so easily threatened, but they could be bribed with half of Poland, the Baltic and a slice of Finland. Even so, everything depended on the French and British believing that an invasion to the Rhine would only bolster Hitler's popularity, not destroy it. So, as Mises notes, leaflets were dropped instead of bombs.

Peter Ringel writes:

The left here always gets a little bit annoyed when one highlights, that NAZI stands for National SOCIALISM (A member of the National Socialist German Workers' Party NSDAP). It would be nice if more (in Germany) understand, that economics is the driving force of history–not political or religious "ideas".

Dec

9

From a NYT article:

In the past 60 years, every recession has been preceded by an inverted yield curve, according to research from the San Francisco Fed. Curve inversions have "correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession," the bank's researchers wrote in March.

anonymous writes: 

Cleveland Fed has a dedicated website on the YC. Lately the probability of recession in the next year has increased to 20%+ some good literature on the subject by the NY Fed.

While historically it has been a solid predictor, the timing is tricky and not stable (can you afford to be short the market at least a year before a recession) and its predictive power has decreased over the years. The evidence in foreign markets is also mixed (look at the UK in 2000s where a decent portion of the time the YC was flat/inverted). It is what someone will call a weak predictor. One would think that you might find a better forecast in specific industries/sectors (eg financials) than the market as a whole.

It's worth mentioning that inverted yield curves were the norm before 1900. Most academics attribute that to wars; if a country survived in the short-term (wars), it had less risk over the long term. Similar to the VIX term structure during sell-offs. 

Peter Ringel writes: 

We had so many bogymen on the news-wire today.
Everyone is free to choose the fear he or she desires:
- yield curve 
- Russia military aggression (old news- but displayed as new)
- Italy risk (old news)
- Brexit fail
- Trump-China back paddling ("China is puzzled" <- this one is real IMO )
- FED talk
- IRAN war (old news)

Probably all a campaign.

Ralph Vince writes: 

Alright, since the media is yield curve obsessed, I'm copying what I posted to another list, expletives deleted.

This talk of an inverted curve by taking segments out is the most ignorant discussion in the media on the topic i have ever seen. When there are inflection points in the curve, which are COMMON, historically, there are portions of inversion, of course.Throughout the late 90s, when the 20 was above the 30 year, was anyone calling it an INVERTED YEILD CURVE!!!!! (and screaming about it, as they do now?)

In late 1998, there were at least FIVE inflection points using the main maturities on the constant curve, and three segments that were inverted. Things were pretty strong in the economy until hints of slowness in 2001Q2.

This is more bull***it financial writing, along the lines of "longest expansion in history," etc.

Who knows, maybe a slowdown is upon us (not evident in any numbers I keep - yet) but the yield curve is NOT inverted.

Russ Sears writes: 

Perhaps they have learned after Trump's election that making the first move instills confidence in the dip buyers Trump optimism. But selling after a big up Trump day the opposite.

anonymous writes:

It would seem that those that believe Trump knows what he is doing now move regularly before those who doubt him.  

Kora Reddy writes: 

1. When T10Y2Y goes below zero for the first time in 250 days (one year) and forward $SPX index returns:

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2. When t10y3m goes below zero for the first in a yr:

 

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3. When T10YFF goes below zero for the first time in a year:

 

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