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

12

"Free trade" never loses an argument; it is like being in favor of virtue. Even the worst sinner knows that vice is not to be publicly defended. The difficult for those of us in the bleachers is that we have never been able to avoid asking the follow-on question: if you don't like tariffs as taxes, what do you want to have instead? Adam Smith's answers were (1) domestic excises - the sugar is allowed to arrive untaxed and then have a tax levied when it is sold and (2) occupancy taxes - to be measured by how many windows a building had. What is never mentioned, of course, is that Smith was completely in support of the navigation acts; Britain would have "free trade" but only on cargoes carried on British ships that traveled directly to British ports. His specific comment on that question was: “Defense is of much more importance than opulence.”

William Huggins writes:

i'm all ears to hear what national security threat the us is responding to with their 50% tariff on aluminum processed where there is an abundance of clean energy to do so and (until recently) all but perfectly aligned nat sec interests with the processor?

Stefan Jovanovich responds:

The answer offered by the authors and voters who made the Constitution the national law was "protection". I offer this only as an historical explanation, not advocacy, since those of us who live on popcorn and waiting from spring (what Rogers Hornsby said he did after the baseball season ended) have abandoned all attempts to understand what is called "policy", whether monetary or otherwise.

Art Cooper asks:

May I have your thoughts on Henry George's advocacy for the replacement of all other taxes by a land value tax?

Henry Gifford comments:

I think Henry George’s idea has a lot of merit, and not just because I heard that my father once taught at The Henry George School of Economics.

More than one calculation has shown that the cost of complying with tax laws in the US is about equal to the amount of taxes paid. If a land value tax eliminated all other taxes, almost all that cost would be saved. But, this would disadvantage the government because vague and complicated laws can be used by the strong against the weak, something not many in government want to see the end of.

Then there is the issue of jobs. The existing tax systems create a huge number of jobs, most of which would go away with a greatly simplified tax. Sure, those people could find more useful endeavors, increasing wealth for all, but if politicians started talking like that a lot of other things would be seen as folly.

Disagreements about the value of land could be handled like the ancient Greeks did – anyone claiming a lower value for their property can be challenged to sell it at that lower price.

A similar situation exists with the part of building design laws that regulate the energy efficiency of new buildings that get built. Now the laws run to hundreds of pages, which makes them very difficult to enforce. The vagueness gives the government people more power, as they interpret the laws as they see fit, or as they are paid under the table to do. For a time I was advocating a simple energy code: limit the size of the heating and cooling systems installed per the size of the building (you-tube: “The Perfect Energy Code”). Governments around the US were loathe to adopt a simplified energy code, because then jobs would be “lost” and the power to make arbitrary decisions would be reduced and the laws would actually be enforceable. A simplified tax collecting system will probably always be unpopular for similar reasons, despite what I think is a lot to recommend it.

Stefan Jovanovich responds:

Smith agreed with Henry George. He thought a land tax had all the attributes of a good tax, unlike income and employment taxes, which were the worst possible ones. Even tariffs had some virtues compared to those that required citizens to tell the state everything.

Oct

16

Saudi Arabia has announced the Rise Tower that is likely to have a height twice that of Burj Khalifa! 2000 meters up from the ground! It is likely to cost 5 Billion Dollars. One is left wondering in a world where everyone manages to almost manages to get decent enough sleep every night with Trillion Dollar deficits, what is Hubris doing having been left so far behind!

Nils Poertner writes:

Wondering what to make of this though, Sunil. Saudi Arabia's main stock Index (TASII peaked in 2006. and never fully recovered properly. Any idea how to express it into some trading idea so we can test our hypothesis?

William Huggins comments:

The 2006 Saudis run is very similar to the soul al manakh run up 20 years before. In particular for Saudis though, it's a market that forbid ahoet selling so when the bulls got started there was no guardrail until they simply could find no bigger fool.

Nils Poertner responds:

Thanks William. Maybe one needs to look at oil (bearish oil story?) - oil doesn't move forever and then it moves a lot. (not an oil trader though - just something that came to mind)

Alex Castaldo offers:

For those too young to remember the events of 1981:

The Souk al-Manakh Crash

From 1978 to 1981, Kuwait’s two stock markets, one the conservatively regulated “official” market and the other the unregulated Souk al-Manakh, exploded in size, growing to the point where the amount of capital actively traded exceeded that of every other country in the world except the United States and Japan. A year later, the system collapsed in an instant, causing huge real losses to the economy and financial disruption lasting nearly a decade. This Commentary examines the emergence of the Souk, the simple financial innovation that evolved to solve its rapidly increasing need for liquidity and credit, and the herculean efforts to solve the tangled problems resulting from the collapse. Two lessons of Kuwait’s crisis are that it is difficult to separate the banking and unregulated financial sectors and that regulators need detailed data on the transactions being conducted at all financial institutions to give them the understanding of the entire network they must have to maintain financial stability. If Kuwaiti officials had had transaction-by-transaction data on the trades being made in both the regulated and unregulated stock markets, then the Kuwaiti crisis and its aftermath might not have been so severe.

Aug

27

The opportunity lies with the supplier, not the providers of AI.

Larry Williams asks:

Who are the suppliers?

Stefan Jovanovich answers:

Nvidia. My 19th century brain thinks of NVDA as a supplier of the stuff the people selling information tickets will use to build their 21st century railroads.

Easan Katir writes:

Agree. Those creating the AI platforms won't generally be good investments, imho. Why? They lack one thing needed: scarcity. Any intelligent person can feed his/her data into an LLM and create their own AI for $20 / month or less. China's DeepSeek is free, I've read. Hard to make a profit when competing with free.

Last month I had lunch with an author cousin who lives in Tehama Carmel Valley. She uploaded all her books into an LLM, cloned her voice with another AI service, connected that to her voicemail. Now her clients can call her number and her cloned voice answers all their questions based on the knowledge in her books. All while she's having lunch.

AI + robotics will be a theme, such as Elon's Optimus and robo-taxis, yes? Investing in the suppliers is mostly done, isn't it? NVDA being the most obvious. Along with LW, other inquiring minds wonder which companies you have in mind.

William Huggins responds:

don't forget the coal and iron mines, those essential input assets that 19th century railroad magnates knew could be pilfered via land "grants". i think the equivalent is looking at the companies involved in the chip etching (who makes the lasers, etc).

Henry Gifford comments:

FRED says that Railroad stock prices weighted by number of shares went up x7 over 70 years [to 1929]. Nice, but not fantastic, but weighing by number of shares could be misleading because of reverse splits, shares of a new company replacing a larger number of shares of the old company in a buyout, survivorship bias when a company goes bankrupt, etc.

% of market cap can I think also be misleading because of people pouring huge amounts of money into companies with no revenue in the hope of future returns, adding to market cap.

Stefan Jovanovich responds:

In the last third of the 19th century, the money made in railroad investing was in the bonds, not the stocks. That was the recital of the FRED data that some found so surprising. For this 19th century mind those results are not surprising because the one President in the century who could do the math killed the speculation in international money.

Jul

23

Donald Trump set to open US retirement market to crypto investments
President preparing executive order to allow 401k plans to tap broad pool of alternative assets

Hm. Entry for ordinary folks or a sneak way / exit for established players? Have a got a picture of the angel fish in my office, to remind me of the deceptive nature of markets. Angler fish are those ambush predator fish living in deep sea, that can illuminate poles in front of their jaws….to catch smaller fish.

William Huggins writes:

am reading Gustavus Myers' History of Great American Fortunes (1907) at the moment and just absorbed 300 pages of railroad fraud perpetrated by those who got their hands on the "mcguffin" asset and then sold it off only once they had successfully looted the value. the same sort of economic transfer happens for early crypto adopters - those trillions of market cap are "paper only" until some rubes can be fleeced of their efforts for the worthless securities foisted upon them.

Stefan Jovanovich comments:

I hope this comment will not be read as argument or rebuttal but only as a factual footnote to Myers' work. The 50,000 shares issued by Fiske et. al. were "legal" in the same way that carried interest is "legal". They were allowed by New York State law in 1868.

The primary limitation on the issue of new shares of common stock for the Erie was its corporate charter. The board only had authority to issue $30 million in capital stock. Any issues above that amount required amendment of the corporate charter by the legislature and majority shareholder approval. The additional 50K of stock issued, at its par value, did not increase the total capitalization above the $30 million limit.

NY State law in 1868 allowed non-cash consideration. The contracts that the Erie board accepted as payment for the new shares were, in nominal dollars, fully equal to the par value of the shares issued. Shareholders had the right to challenge that claim; they were, as litigant frequently are, disappointed by the rejection of their challenge. The result was a situation that can be politely described as "judicial uncertainty" - i.e. a battle of conflicting injunctions.

Jun

3

I can't find any books from the 1700s. Big events like the Mississippi Scheme and the South Sea Bubble happened in that period. But I can't find literature from the 1700s of people describing markets then. Maybe they had PTSD from having their fingers burnt? I heard Newton never wanted anyone to mention "South Sea" around him. (he lost his pile in the investment)

Stefan Jovanovich responds:

Essai sur la Nature du Commerce en Général, by Richard Cantillon (1680s–1734)

During 1719 Cantillon sold Mississippi Company shares in Amsterdam and used the proceeds to buy them in Paris. Mississippi Company shares surged from 500 livres in January 1719 to 10,000 livres by December 1719; during the same period the prices in Amsterdam went from 400 to 7,000. The daily average spread is calculated to have been between 20% and 40%.

Carder Dimitroff suggests:

Empire Incorporated — The Corporations that Built British Colonialism, by Philip J. Stern

The book provides historical perspectives about British markets and corporate financing. It's not an easy read, but it is fascinating.

William Huggins writes:

there is a collection of "things written afterwards" about 1720 called The Great Mirror of Folly but its mostly moralizing tracts than a steely-eyed review of what went down. keep in mind the experience (a bubble in uk-fr-nl, all at the same time) had profound effects on the market for almost a century afterwards with the fr retreating from paper money and the british passing the bubble act which made it waaaay harder for anyone to raise capital. trading stock largely returned to being an insiders game until the 1800s. GMoF was recently published along with a pile of other primary docs by Yale U press:

The Great Mirror of Folly: Finance, Culture, and the Crash of 1720

I like the goetzmann treatment of 1720 from Money Changes Everything personally. He's got a couple of good recorded talks on it too. for those interested in institutional developments around markets and financial institutions in north america, I strongly recommend Kobrak and Martin's "Wall Street to Bay Street."

Steve Ellison offers:

Extraordinary Popular Delusions and the Madness of Crowds was written in 1841 by Charles Mackay. The first three chapters are devoted to the Tulip Mania, the South Sea Bubble, and the Mississippi scheme. The remainder of the book is about non-financial episodes of irrationality, including a chapter about plagues that I re-read closely in March 2020.

May

30

Perplexity says it best:

The U.S. population is projected to keep growing through the end of the century, mainly due to immigration, even as deaths begin to outnumber births after 203325. By 2055, the U.S. is expected to reach 372 million people, with net immigration as the primary driver of growth. In contrast, China faces a rapidly aging population: by 2050, about one-third of its population will be over 65, and the number of elderly will vastly outnumber children, creating an “inverted pyramid” demographic structure. This aging trend is expected to slow China’s growth and strain its social systems, leading some to describe China as “becoming a nursing home” by century’s end. Meanwhile, the U.S., thanks to sustained immigration, will remain younger and larger than it would be from natural increase alone.

Asindu Drileba writes:

Professor Bejan's constructal law guarantee's that China will go bust on a long enough time horizon. I attribute this to China's rigid political system. Like Daenerys Targaryen said, "Those that don't bend, will break." Professor Bejan's TED Talk.

William Huggins responds:

for entirely different reasons, both Daron Acemoglu (econ Nobel 24) and Peter Zeihan are also in the China-bear camp long term - the former due to hitting the limits of "growth under extractive institutions", the latter due largely to demography (even if his tone is alarmist). Dalio's indicators suggest the opposite but all his data comes from a demographic regime of pyramids, not chimneys or inverted pyramids so i'm not sure his forecast will play out.

May

25

This morning I finished rereading the classic Atlas Shrugged of Ayn Rand and every time I learn something new; her thought is monumental. I don’t agree with a lot of her ideas and I fully agree with others, but I’ve always found this book to be an impressive catalyst for thought; this is in my opinion her power: the ability in sparking debate.

Rich Bubb comments:

Atlas Shrugged is also available as a 3-part movie. I think the book was better.

Adam Grimes writes:

My opinion on her work has shifted over the years, in a strongly negative direction. Too much of my experience contradicts her metaphysics and epistemology, particularly the rigidity of her rational materialism, and, as someone who treasures the craft of writing, much of her prose lands as clunky and overly didactic. I'm also now unconvinced on the primacy and sufficiency of rational self-interest… but, as you said, perhaps her greatest value is in creating discussion.

Asindu Drileba adds:

Ayn Rand had a reading group called the "Ayn Rand Collective" — Which Alan Greenspan was part of. They [Greenspan, Rand and a "professor"] would meet at Rand's apartment to read every new chapter of her new book. She (Ayn Rand) then fell in love with the professor and they started dating.

After sometime, the "professor" encountered a pretty young student in his own class and he "fell in love with her". The professor told Rand about the affair, but Rand begged the professor to cancel it. The professor then said that he would dump Ayn Rand, and then exclusively date the young pretty student. He said that this was the right thing to do since he was following his "rational self-interest". Ayn Rand got angry, slapped the professor in the face twice and kicked him out of her reading group.

This was a good illustration of cognitive dissonance. Rand thought her readers should practice "rational-self interest" towards everyone else, except her.

Francesco Sabella met a girl:

I was very fascinated to meet a girl times ago who I knew for her philanthropic activities and for her ideas being the exact opposite of Rand; and I was surprised to see her carrying an Ayn Rand book and she told me she didn’t like at all her; it made me think of her ability in creating debates.

Victor Niederhoffer responds:

i would always marry a girl who admired the book. susan introduced me to it and i knew then i had to marry her. it was very good choice.

Read the full conversation.

May

20

Which are the flaws of trend following strategies? For me, the markets are homeostatic but not in a strictly way, they are like a thermostat trying to keep a room’s temperature steady. But, sometimes they can spiral into imbalance when people’s actions and beliefs feed off each other.

I’m amazed by how this dynamic of the markets has never been of particular interest in the academic world. It’s years since I don’t put in serious research given my focus on active trading, but unless something changed over this time, The classics wisdom is that markets are (let’s leave the perfectly efficient markets alone) in a perfect world supply demand state, I don’t remember having read of documented positive feedback loops etc, and overshooting and disequilibrium, which are clearly the case. I studied economics and I always found funny how some theories are.

William Huggins writes:

econ is not the right place to learn about markets because the demands of "equilibrium" require us to bend reality into the "preferred" (supposed logical) state. what most EM theorist missed was the friction in markets (adjustment time, imperfect info, etc). but momentum has been documented by financial theorists for decades. you're just digging in the wrong part of the field.

Francesco Sabella responds:

I know momentum has been documented, my point was about my economics classes, where I’ve never read about the topic, but also about how the mainstream academia is built - disequilibrium is not the classic wisdom and not even considered; you’re right that some academics have addressed momentum, but the mainstream economics is still fixated with equilibrium.

William Huggins adds:

econ likes equilibrium because its calculable, and because it approximates a physical science - if only those pesky active agents weren't so concerned about their perception of what matters instead of just obeying economists' assumptions!

in the end, its -hard- to math out the implications of imperfect, changing perceptions among a changing cast of strategically interacting characters when the targets are moving and trading may (or may not) be informed. because of these challenges, most prefer to stick to sanitized general equilibrium models, even if those are basically mathematical masturbation based on definable, stable, continuously differentiable utility functions. people usually find it expedient when modelling to pretend the net impact of all the above microstructure is "random" (its not really random, more like "too complex to model") within some defined distribution, which itself is a fudge but as Bachelier showed in 1900, might not be a bad one (and it helps avoid overfitting your forecast models).

here's are a couple of articles less than 30 years old on dynamic disequilibria (i cited Jegadeesh and Titman years ago so they were top of mind). the first talks about implications for macro, the second for asset pricing:

Towards a Dynamic Disequilibrium Theory with Randomness

Quantum Equilibrium-Disequilibrium”: Asset price dynamics, symmetry breaking, and defaults as dissipative instantons

May

13

I am putting together a list of the Best Investments Books of the Year. I am not seeing many great books on trading, investing, finance, markets, crypto, options, futures, cycles, etc. I would love to hear if you folks know of any great books out in the past 6 months or so or coming soon.

Matthew Gasda is justifiably proud:

The Sleepers: A Novel

Big Al offers:

This is high-level quant stuff - ie, over my head, and despite "Elements" in the title - but a fun stretch:

The Elements of Quantitative Investing (Wiley Finance) 1st Edition, by Giuseppe A. Paleologo

His more basic 2021 book is "Advanced":

Advanced Portfolio Management: A Quant's Guide for Fundamental Investors, by Giuseppe A. Paleologo

Carder Dimitroff suggests:

This book is about historical finance and may not be a direct response to the question.

Empire, Incorporated: The Corporations That Built British Colonialism, by Philip J. Stern

William Huggins responds:

on a similar (historical) note, one of my students just recommended this title to me. looking forward to cracking it later this month:

Ages of American Capitalism: A History of the United States, by Jonathan Levy

Asindu Drileba adds:

If you would regard a speculator/investor as someone who also builds businesses:

Never Enough: From Barista to Billionaire, by Andrew Wilkinson

Andrew is building Tiny. His intention is to build the Berkshire Hathaway of Tech and software. He is inspired by Monish Pabrai (The Dhando Investor). So he is more in the "Value investing" camp not really quantitative.

Apr

26

Does someone have a great modern macroeconomics book to recommend?

William Huggins responds:

it depends how theory heavy you want it to be. the author i usually recommend is Mankiw but Williamson (intermediate) and Romer (advanced) are good too depending on your needs. for the best "whole picture" i like a CFA publication from 2013 called Economics for Investment Decision Makers, by Piros and Pinto, which gives a great summary of micro, macro, and int'l econ under one roof.

for single-day-beach-reading i bought a casually interested buddy a copy of How Economics Explains the World, by Andrew Leigh, which is a great intro for non-users.

Apr

24

Planck's principle:

A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it…

An important scientific innovation rarely makes its way by gradually winning over and converting its opponents: it rarely happens that Saul becomes Paul. What does happen is that its opponents gradually die out, and that the growing generation is familiarized with the ideas from the beginning: another instance of the fact that the future lies with the youth.

— Max Planck, Scientific autobiography, 1950, p. 33, 97

relevance of how new ideas are being adopted in science, markets, everywhere.

Jeff Watson responds:

Science by consensus is not science. Just ask Galileo.

Pamela Van Giessen writes:

John McPhee wrote extensively about this and how the science of geology advanced over a few centuries in Annals of the Former World. Scientific community consensus is pernicious, and it is clear that there is mostly no convincing it.

William Huggins comments:

the foundation of science rests of replicability - anyone with the same data should be able to replicate results (even if they disagree about the mechanism). once replication is established, the difficult questions come from "is this data sufficient and representative?"; "is the data generating process stable or dynamic?"; "did i gather data in support of my hypothesis or to try to disprove it?". the fun stuff.

philosophy of science ensures we ask good questions and have good tools to tackle them with. this is why the Ph in PhD is short for "philosophy."

correction: "same data" is the wrong phrase - "equivalent, out-of-sample" would be a better choice of words.

Asindu Drileba writes:

The problem with the human mind is that it has too many glitches. You can verify data successfully and still be wrong. Here are two examples from Astronomy. First, The Mayans had models that would accurately predict eclipses. So, your data of when eclipses occur would replicate really well with their model. However the model of the solar system the Mayans used, had the Earth at the centre and the Sun revolved around it. The assumptions of the model were completely wrong, but the data (predictions) were accurate.

Second, is Newton's models, that predicted the movement of a comet accurately. Then you often here people say that Einstein proved Newton wrong with Relativity.

I think when it comes to science, explanations are very flimsy. What should matter is if the idea useful or not.

Francesco Sabella responds:

I think it’s a very good exercise to start from the point of view that our mind is bound to make mistakes, have glitches and start to work from that assumption; even if it’s not always true but it can be good as working hypothesis.

Big Al recalls:

Years ago, doing simple quantitative analyses to post to this list, I learned that one of the biggest pitfalls was my own desire to get a nice result.

Apr

16

That is the creature Hugh Hendry - the Acid Capitalist - says we have to find in order to profit from our speculations.

The events in Ukraine are that gorilla. They are predicting the likelihood that Trump, Putin and the Muslim oil producers will establish a Drill, Baby, Drill world of orderly energy production and supply priced in U.S. $. The effects on the European and Asian consumers will be comparable to what happened to the German-speaking world and its silver standard when the French fulfilled the terms of the Treaty of Frankfurt by paying their reparations in gold.

Big Al needs some help:

Perplexity answers the question, "What happened to the German-speaking world and its silver standard when the French fulfilled the terms of the Treaty of Frankfurt by paying their reparations in gold?"

Stefan Jovanovich answers:

They = "events, dear boy". The prediction is that the new cartel of oil and gas exporters will establish "orderly production" that manages the risks of overproduction in the same artful manner that OPEC once operated before the invention of fracking.

William Huggins responds:

So you are suggesting us producers will submit to directives from moscow or Riyadh to limit their production? No evidence of anything but predation among those players but somehow trump purs them all on the same page? I have a bridge for sale….

Read the full conversation.

Apr

5

I'm liking the look of that huge spike down in ES, out of my euro and sterling, that was a crazy move too. Technically it's nice looking low, from a chart perspective. I'm liking the low interest rate and commodity softening posture, I'm pretty damn bullish on equities.

William Huggins responds:

the shock moment is not when the canes come out - those metaphorically come out when the bulls have given up. those are generational moments related to the culling of new speculators who have only known rising markets (ie, anyone who joined robin hood with their stimulus checks in hand). as long as there are people willing to pay x60-100 earnings for hype, i don't think its quite time for a shift in strategic allocation.

this is simply the first serious wakeup call for anyone who thought this administration is doing anything remotely like macroeconomic analysis when it sets policy. according to the executive, there will be more such shocks to come so as many were fond of suggesting in mid-november "buckle up" (your 401k, and the usd, have both been liberated from gravity!)

Steve Ellison comments:

The S&P 500 has not even gone off the bottom of my hand-drawn chart. The move down since yesterday strikes me as more an efficient market repricing of reduced economic prospects than an emotional panic or forced selling.

By contrast, my hand-drawn chart on February 28, 2020.

Adam Grimes states:

Canes? Nowhere close, in my opinion. And the fact that many people think this is a crash is just a lack of perspective (and a misunderstanding of potential.) Again, all in my opinion, which may change with any tick.

UPDATE: Stefan Jovanovich has a shopping list:

The idiot list is the catalog of companies that our model collects on the presumption that their common stocks will be worth more in 5 years than they are now. I publish it when we guess that our stupidity is within the 25% range - i.e. we won't lose more than $1 out of every $4 we invest in those companies if they liquidate. Thanks to the List and others, we have learned not to trade so the publication is, in no sense, a "Buy"; it is simply an indication that prices have gotten low enough that the list has more than 10 companies on it. (A month ago it had 5.)

Feb

3

What causes inflation? Suppose we define inflation simply as the rise in prices of commodities, stocks, real estate etc. What causes it?

1) A generic explanation people offer (acolytes of Milton Friedman & Margaret Thatcher for example) is to blame monetary policy. Simplified as, inflation is caused by "too much money chasing too few goods."

Many people blamed President Trump's COVID stimulus packages for the rise of prices during that period. It seems specs in this list agree upon this when it comes to stock prices, i.e., lower interest rates (higher money supply) -> Higher stock prices (inflated stock prices).

2) An alternative explanation is that higher prices are caused by supply chain issues.

So they would claim that higher commodity prices were so because it was extremely difficult to move them around during lockdowns, let alone processing them in factories. A member also described that egg prices may be going up because of disease (a chink in the supply chain) not necessarily monetary policy. I am thinking that supply chain issues are more important to look at, than monetary policy.

Larry Williams predicts:

Inflation is very, very cyclical so maybe the real cause resides in the human condition and emotions. It will continue to edge lower until 2026.

Yelena Sennett asks:

Larry, can you please elaborate? Do you mean that when people are optimistic about the future, they spend more, demand increases, and prices go up? And then the reverse happens when they’re pessimistic?

Larry Williams responds:

Just that it is very cyclical— as to what drives the cycles I am not wise enough to know…though I suspect…some emotional pattern dwells in the heart and souls of as all that creates human activity—along the lines of Edgar Lawrence Smiths work.

Read the complete thread.

Dec

29

Chance, luck, and ignorance: how to put our uncertainty into numbers - David Spiegelhalter, Oxford Mathematics

We all have to live with uncertainty. We attribute good and bad events as ‘due to chance’, label people as ‘lucky’, and (sometimes) admit our ignorance. In this Oxford Mathematics Public Lecture David shows how to use the theory of probability to take apart all these ideas, and demonstrate how you can put numbers on your ignorance, and then measure how good those numbers are.

Coffee cup he got from MI5 showing verbal-numerical scale they use.

Also: The Art of Statistics

William Huggins offers:

i like to give this guide to my students for whom English is a 2nd/3rd (sometimes 4th+ language).

Kim Zussman is unimpressed:

David Spiegelhalter was Cambridge University's first Winton Professor of the Public Understanding of Risk.

Translation: He is the most qualified of the vast array of those who don't know WTF they are talking about, but are knighted to tell us.

Peter Grieve responds:

I heard a story a decade ago about one of the big decision theorists, I think it was a Harvard professor. He was offered a position somewhere else, and was agonizing about whether to accept it. A colleague suggested he use his decision theory, and he said "Come on! This is serious!" I've no idea about the veracity of the story, or who was involved.

Alex Castaldo clarifies:

You are talking about Howard Raiffa. The story was told by another professor, although apparently Raiffa later denied that he had said it.

Nov

14

Should the market cap of crypto currencies be included in money supply for macroeconomic purposes?

William Huggins replies:

I'd you cant use it to pay taxes it doesn't count (just another asset, like a stamp).

Kim Zussman asks:

Why not? They add because if you pay taxes with fiat you can buy merch with crypto.

William Huggins responds:

you can barter wine or chocolate for a ton of things online too but we don't count those either. if money is "anything taken as payment" then we have to get very serious about "degrees of moneyness" (hence m0,m1,etc). in that spectrum, its pretty clear that the only things on the list are legal tender so unless you live in the land of bukele, it doesn't count (also, whose money supply does crypto count as exactly?)

Peter Penha:

I will volunteer that there is no moneyness to crypto as it was determined a 100% haircut asset by the DTC.

I think this leaves Blackrock and other crypto ETF managers in the interesting position that they cannot include crypto ETFs in one of their asset allocation funds or a target date fund, etc - inclusion would pollute.

Crypto in the USA appears to be a walled garden - the only contagion I can see to the financial world would be to holders of Micro Strategy Convertible Debt.

Stefan Jovanovich writes:

The question you all are raising here has a history - how far can "the law" go to monetize promises to pay? Originally, the answer was not one step. The Constitution says that legal tender can only be Coin. Article I, Section 8.

The lawyers have been working around that limitation ever since. Their greatest difficulty has been getting around the literalist non-lawyer Presidents who keep following the actual instructions the People established by vote as "the law".

Success came with the Aldrich-Vreeland Act which authorized banks with Federal charters to form "currency associations". Those were given authority to issue emergency currency could be backed by securities other than U.S. bonds, including commercial paper, state and local bonds, and other miscellaneous securities.

Section 18 of the Act: "The Secretary of the Treasury may, in his discretion, extend from time to time the benefits of this Act to all qualified State banks and trust companies, which have joined the Federal reserve system, or which may contract to join within fifteen days after the passage of this Act: Provided, That such State banks and trust companies shall be subject to the same regulations and restrictions as are national banks under this Act: And provided further, That the circulating notes issued under this Act shall be lawful money and a legal tender in payment of all debts, public and private, within the United States."

Everything since 1908 has been a variation on that theme - "lawful money" can be whatever Congress says it is.

Bill Rafter comments:

I started this question because I am working on a slight variation of digitally quantifying inflation. With the loose definition of inflation being “too much money chasing too few goods”, then the “money” part should include all that can conceivably buy the “goods”. Since one can increasingly buy a whole lot of stuff with crypto, then crypto deserves inclusion. If one were to fast-forward to a time of massive currency instability (this is just a thought experiment), having included the cryptocurrency might have facilitated greater forecasting.

Stefan Jovanovich adds:

For me the paradox of Bitcoin is that it has been a spectacularly successful asset - like a share of Berkshire Hathaway stock bought in the days before Buffett even went public - but it has never been a money. If I had Bill's brain and cleverness, I would try to include in the calculations the sum of personal and corporate credit that the lenders cannot easily pull away from the table (the potential moneyness supply) and the amount of credit actually used; and then seek the correlations to the fluctuations in that spread. In the days before central banking, speculators watched the net supply of commercial paper as such an indicator.

Sep

2

Counting: Seasonality

September 2, 2024 | 1 Comment

A lesson from the archives: Seasonality and changing cycles, by Victor Niederhoffer and Laurel Kenner, (04/26/2004)

A good part of the anomaly literature is devoted to studies of seasonality. A basic problem with these studies is that merely picking a season to study involves making guesses as to when and where the seasonality is. For example, is it in January or December, on Monday or Friday, in the United States or the Ukraine? (Yes, our Google search turned up a study of anomalies in the Ukraine.) Thus, the very choice of a subject might involve random luck.


Another aspect of seasonality studies that must be considered is whether the effects noted are sufficient to cover transaction costs. A retrospective study showing that you can make 2 cents more on Friday trades than Monday trades in your typical $50 stock would not be sufficient in practice to leave anyone but the broker and the market-maker richer.

Thus, it's essential to temper the conclusions of such studies with out-of-sample testing — in other words, with real trading.

[ … ]

Comment by Philip J. McDonnell, a former student of the Chairman at UC Berkeley: Dr. Niederhoffer points out that there is no a priori reason to believe that any one day of the week is stronger than any other. Thus when Y— collected the data (thank you!), presumably the reason was to find out if any days of the week behaved differently. Only after peeking at the data was it possible to say that Monday was the best and Tuesday the worst.

There are 10 such pairwise comparisons:
Mon with other 4 days 4
Tues with 3 last days 3
Wed with Thu & Fri 2
Thu with Fri 1
Total 10

In other words it is also possible that Tuesday could have been the best day and Monday the worst or any other pairwise comparison by chance alone. So when the one best and the one worst day shown by the data are compared and shown to have say a 5% significance we need to remember that we implicitly ruled out the other nine cases which weren't the best or worst. So we need to take our 5% number and multiply by 10 to get the correct significance of 50%. 50% is exactly consistent with randomness.

The problem is multiple comparisons are often subtle and remain unrecognized. Multiple comparisons are insidious because they dramatically reduce the power of the statistical tests we employ.

[ … ]

[More reading: Multiple comparisons problem]

William Huggins offers:

Bonferonni method suggests raising the confidence level proportional to the number of tested hypotheses. To get 95% confidence despite ten tests, he suggests 99.5 as a threshold.  It's a huge problem when testing which variables to include in a regression model.

Asindu Drileba writes:

The right way to do this type of thing is to form a specific hypothesis based on a single comparison and then to test it on the data. It is even possible to use data from a prior period to formulate our hypothesis. We then test our hypothesis on the subsequent period which excludes the period where we formed our hypothesis.

This is an approach used in machine learning. Datasets are always split into "training" and "test" datasets. "Training" datasets are exclusively used to build the components of the model. "Test" datasets are not used to build the model at all. They are excluded when building the model. The model built using the "training" dataset is then asked to make predictions on the "test" dataset. The accuracy on predictions made on the "test" datasets is then used to determine how accurate the model is (so it can be tuned for improvement or thrown away).

I found this particular statement from the full post so insightful because I didn't think of applying this approach to building models using other statistical methods (I thought it was something limited to machine learning).

Aug

25

What is the role of Machine Learning models and Features selection in this "counting" philosphy? Have all these "new" methodologies overcome and made useless the traditional counting and statistical approach? Or can they coexist, as long as one can find a niche in which to conduct profitable operation?

William Huggins responds:

ML and feature selection run on "traditional statistics", which is basically about comparing empirical data to what randomness around a benchmark should look like. think of them as like hydraulics, which transformed the shovel into the backhoe for large operations but without rendering the "basic version" obsolete.

Big Al links:

In the Google Crash Course in Machine Learning, the first model is Linear Regression.

Aug

24

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

William Huggins replies:

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

Zubin Al Genubi adds:

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

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

Penny Brown adds more:

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

Asindu Drileba responds:

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

Humbert H. asks:

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

Laurence Glazier offers:

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

- Gottfried Leibniz

Aug

23

Today, the U.S. Energy Information Administration (EIA) is counting how many power plants were added in the first half of 2024 and projecting how many will be added in the last half.

It's all wonderful news. About 20.2 GW (the equivalent of about 18 nuclear power plants) were added. By the end of the year, EIA expects about 62 GW of new capacity. About 95 percent of these additions are intermittent sources (wind, solar, batteries).

Offsetting this new capacity are retirements. Utilities plan to retire 7.6 GW, all of which use coal, natural gas, and petroleum as fuel. They are likely being retired because they are uneconomic and rarely dispatched. Their levelized costs exceed revenues, and investors want to tidy up their books.

Statistics unearth a problem that counting hides. The problem is not on the supply side; it's on the demand side. Specifically, counting 24/7 demand reveals tremendous growth (e.g., baseload). It appears there's a hidden mismatch between supply and demand. While there will be hours on most days when the grid is flooded with cheap power, there will also be hours on other days when there will not be enough supply to serve all loads.

Retail prices will jump. In fact, they already have. PJM is the Regional Transmission Organization (RTO) that manages bulk power markets for the mid-Atlantic region. It's one of the largest of the nation's ten RTOs. In addition to transmission line responsibilities, PJM manages energy and capacity auctions for power plant production.

PJM conducts an auction for capacity each year. Power plant asset owners may enter the auction and offer their prices. Owners are paid a daily rate for each megawatt if their bids clear. Auction results:

2024/2025
$28.92 / MW-day

2025/2026
$269.92 / MW-day

Next year, a 1,000 MW power plant can earn $269,920 daily compared to $28,920 this year. These payments are in addition to any revenues earned from energy auctions.

While these auctions seem arcane to the average consumer, they will feel it in their pocketbooks—and not just in one part of the country—it's everywhere. All these costs will flow to the consumer, who will have only the choice of paying or reducing consumption.

Two options may become quickly viable. One is to build gas turbines as fast as possible. To attract investors, capacity payments have to be attractive. But starting new projects today may be too late.

The other option is "demand-response," where consumers are enticed to reduce demand for a price. Demand response is in place today but has yet to be aggressively implemented. It appears grid operators like PJM (not the government) will be forced to become aggressive and offer lucrative demand-response programs.

Lastly, those who invest in "behind-the-meter" assets like their own renewable energy sources, including geothermal, will avoid some of these accelerating costs. Those who have already invested will likely experience returns higher than expected.

The roots of this problem germinated decades ago. That is its own story for another time.

Kim Zussman wonders:

XLU?

Big Al observes:

XLU up 25% from Feb low.

Jeffrey Hirsch was there before us:

Our recommendation at the outset of XLU/Utes seasonal bullish March-Oct period.

Humbert H. writes:

Nuclear is clearly the real solution as the current generation of nuclear reactors are pretty much (we hope) not vulnerable to meltdowns. But as the situation stands, battery technology is likely to receive an ever-increasing amount of investment, and also reused old EV batteries will be more and more prevalent as storage banks for solar and wind. Intermittent sources = more and more need for battery capacity.

William Huggins offers:

one possible solution to transmission problems is to use rail-bound batteries.

Aug

22

A great thanks to Henry for sharing his book Buildings Don't Lie. As a prospective homeowner, I plan to devour it upon arrival.

I don't have a proper book to share but I did author a course on financial history that I teach. To help my students, I recorded all the one-directional talks as short videos. Rather than proceeding chronologically overall, I broke things down into 11 topics (plus an intro) and did those chronologically: payments, debt, banking, central banking, companies, stock markets, derivatives, insurance, trusts and funds, pensions, government finances.

Jul

28

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

Anatoly Veltman wants more information:

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

William Huggins responds:

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

Steve Ellison comments:

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

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

Jul

19

golden ratio of 1.65 appears in thousands of settings over thousands of years.

The Golden Ratio: The Divine Beauty of Mathematics, by Gary B. Meisner (Author) and Rafael Araujo (Artist)

The Golden Ratio examines the presence of this divine number in art and architecture throughout history, as well as its ubiquity among plants, animals, and even the cosmos. This gorgeous book—with layflat dimensions that closely approximate the golden ratio—features clear, enlightening, and entertaining commentary alongside stunning full-color illustrations by Venezuelan artist and architect Rafael Araujo.

A trader writes:

I have used the golden ratio trying to predict where the technical people find Fibonacci support and resistance levels in both cash and futures and applying them to grain spreads and basis capture. This was in conjunction with other tools being used and tested. I completely abandoned the method after finding other, more successful ways that work better than random.

William Huggins offers an historical lagniappe:

Leonardo of Pisa may be best known for his "sequence" but in his lifetime, it was his work as a tutor to the rich business class of late-Medieval Italy that paid the bills. His mathematical treatise Liber Abaci (1202), which was only "recently" translated into English, is broken into chapters including basic operations but he quickly jumps into the calculation of profits from business voyages and even introduces the notion of the time value of money.

Vic's twitter feed

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?

Apr

25

FTC Announces Rule Banning Noncompetes

Today, the Federal Trade Commission issued a final rule to promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

Kim Zussman writes:

This will also help knock down the value of businesses. Mike sells his business to Mary. One week later Mike opens the same kind of business one block away, and contacts all his old customers. How much should Mary pay to buy Mike's business?

H. Humbert comments:

Certainly has more merit than trying to destroy Amazon or preventing Kroger from buying Alberson's, her two other favorite busybody activities. Not a very libertarian thing to do, but noncompetes are often used against many powerless people as a nakedly aggressive move.

The argument she uses is that Silicon Valley where noncompetes are illegal beat out Boston Route 128, and is doing just fine in terms of starting new businesses. Whether it's due to noncompetes or the weather is anybody's guess. The other argument is that noncompetes are used to restrain security guards or sandwich shop workers from getting employment across the street, cases where intellectual property or customer lists are clearly not involved.

Pamela Van Giessen adds:

There is another downside to this. When companies lay off people, especially middle and senior management, they give them attractive parting gifts that are contingent on non-compete agreements. E.g, ABC co lays off senior manager, pays them up to 1 yr salary plus health benefits, etc. but the caveat is that former senior manager doesn’t work for a competitor for x period of time. These workers already have the right to decline the parting gifts if they don’t want to sign the non-compete. Now there is almost no incentive for companies to provide compensation to the people they lay off since they can’t bargain for a non compete. That sucks for employees who can now be laid off with pretty much nothing. I’d say this is a loss for employees and a win for big companies. Thank you to Joe Biden & co.

William Huggins responds:

let's not oversell this - firms seek out non-compete agreements for THEIR benefit, not that of employees. strange that an erosion of their position would somehow strengthen them but war is peace and ignorance strength?

Apr

23

Looks like someone in Can Gov was listening in for ideas (Tax rate to rise from 50% of reg to 67% of reg):

Capital gains tax change draws ire from some Canadian entrepreneurs worried it will worsen brain drain

In the 2024 budget unveiled Tuesday, Finance Minister Chrystia Freeland said the government would increase the inclusion rate of the capital gains tax from 50 per cent to 67 per cent for businesses and trusts, generating an estimated $19 billion in new revenue. Capital gains are the profits that individuals or businesses make from selling an asset — like a stock or a second home. Individuals are subject to the new changes on any profits over $250,000.

Big Al is sanguine:

No worries - it only affects a few:

The government estimates that the changes would impact 40,000 individuals (or 0.13 per cent of Canadians in any given year)…

H. Humbert writes:

With 67%, the government clearly thinks that either it both needs and deserves the profits of some people more than they do OR that those people need to be treated like one would treat an enemy, without any regard for their needs or feelings. Let's see, would a Communist think that way (both ideas) about his or her class enemy?

William Huggins explains:

It's a move back towards the status quo ante 1980s tax cut. The idea that tax cuts are only good is just silly. As silly as the notion that government is efficient with those same taxes. This isn't revolutionary, simply the slow reduction of a subsidy we -thought- would lead to more investment. Turns out future demand is a larger determinant of that than current taxes. We gave too much to capital back in the early 80s when we rebalance last time and now were rebalancing again. Cap gains will still pay less tax than working folks. No need for enemies or "communists".

H. Humbert replies:

I apologize William, the problem was my reading comprehension as I wasn't familiar with the meaning of the term "inclusion rate" in the Canadian tax system and interpreted it incorrectly after, to be honest, spending about 20 seconds to "read" the article. With your explanation and the tiniest bit of research, this makes sense. As I mentioned before, I'm against special cap gains rates, but only if (a) the losses aren't capped (b) there is no special "investment gains" tax as currently exists in the US.

Asindu Drileba adds:

David Graeber once mentioned that the most productive period in American industry was when the tax rates were highest (65%). The referenced the advances made by Bell Labs as a example. He claimed that the productivity occurred because corporations were nudged by the high taxes to invest more money into research and development.

H. Humbert provides context:

Very few people paid the top marginal rate as tax shelters were highly prevalent and a lot easier to use than they are now.

Hernan Avella comments:

True MMT’rs would argue that rates should be 0 and the tax rate higher, as needed to curb inflation.

Apr

16

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

Zubin Al Genubi asks:

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

Larry Williams is definite:

NOPE. NOT AT ALL.

Art Cooper, however:

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

Larry Williams responds:

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

Kim Zussman wonders:

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

Art Cooper suggests:

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

Larry Williams writes:

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

Asindu Drileba adds:

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

William Huggins comments:

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

H. Humbert replies:

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

Apr

15

From Easan Katir:

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

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

From Zubin Al Genubi:

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

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

From Asindu Drileba:

Math Without Numbers, by Milo Beckman.

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

Peter Ringel is watching:

Voltaire: The Rascal Philosopher

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

William Huggins suggests a somewhat older work:

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

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

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

Stefan Jovanovich comments:

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

William Huggins responds:

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

Stefan Jovanovich adds:

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

Mar

29

Weekend reading

March 29, 2024 | Leave a Comment

Recent list recommendations:

From Zubin Al Genubi:

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

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

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

1177 B.C.: The Year Civilization Collapsed

William Huggins adds:

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

From Nils Poertner:

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

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

Mar

19

Simpson’s paradox

March 19, 2024 | 1 Comment

Simpson's paradox is a phenomenon in probability and statistics in which a trend appears in several groups of data but disappears or reverses when the groups are combined. This result is often encountered in social-science and medical-science statistics, and is particularly problematic when frequency data are unduly given causal interpretations. The paradox can be resolved when confounding variables and causal relations are appropriately addressed in the statistical modeling (e.g., through cluster analysis). Simpson's paradox has been used to illustrate the kind of misleading results that the misuse of statistics can generate.

Lance Bialas comments:

Exactly the challenge we face at the macro level currently. Averages are giving us only the opaque as of now: real incomes, mortgage coupons, debt servicing.

William Huggins writes:

i teach people to use paired t-tests as a way of sidestepping the "inappropriate grouping" that causes Simpson's paradox. if you blend up groups rather than comparing like to like, its easy to make a mistake.

Zubin Al Genubi asks:

Would a larger sample size help avoid the paradox? Or higher confidence levels?

William Huggins answers:

t-tests (difference of means) aren't going to solve the problem because they compare average of group 1 to average of group 2. if those groups are composed to two subgroups with distinct traits (highs and lows, whatever) then the average of group 1 is really a weighted average of its two sub-groups. heuristically, we tend to assume that those groups all have the same size but its not necessarily true, which can create the "paradox" in which group 1 has a higher average than group 2, but group 1a < group 2a, and group 1b < group 2b.

the way to avoid it is to not group obviously different populations and then use the average to describe the distribution. but if that's already been done, the next question becomes whether or not there is some "pairing dimension" which explains some of the internal variation in both groups (a test for average difference between paired data points is powerful if your data meets the conditions). otherwise, consider a cluster analysis of some kidn to see if you can't break the larger group into its components (often statistically messy if you use multiple dimensions, easier when you use one or two and can do it by eye to some extent).

Jordan Low wonders:

Isn't the simplest explanation that one test is comparing student GPAs (simply reflecting grades), without accounting for the fact that smarter students take harder classes?

William Huggins agrees:

100%. when I write letters of rec for grad school (for undergrads who came out of sometimes large courses), among other things I include contextual data including rank in class, t-stat relative to class mean, and a raw count of how often they scored above the mean on assessments. when they've taken more than one course with me (have had some reach 4), I run the paired t-test and report their average spread over my own course means as well. recipients still have to benchmark "what a top student from that school" looks like in practice, but it's my (admittedly nerdy) way of helping others make sense of the letter grade on the related transcript.

Feb

4

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

William Huggins responds:

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

Theodosis Athanasiadis comments:

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

Jan

26

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

Asindu Drileba asks:

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

Zubin Al Genubi replies:

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

William Huggins comments:

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

Peter Ringel writes:

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

Art Cooper points out:

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

Zubin Al Genubi responds:

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

Hernan Avella questions:

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

H. Humbert comments:

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

Humbert H. writes:

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

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

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

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

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

H. Humbert responds:

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

Kim Zussman links:

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

Jan

7

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

William Huggins writes:

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

Peter Ringel asks:

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

William Huggins responds:

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

Bill Egan comments:

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

Robust Standard deviation = 1.4826*MAD

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

William Huggins adds:

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

Jan

7

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

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

Nils Poertner writes:

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

William Huggins comments:

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

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

Zubin Al Genubi responds:

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

Dec

21

Chris Alexander on architecture (ugliness, beauty and a lot more) and why it matters to humans. He taught at Berkeley, California. The immediate surrounding (office, residential place) probably also influences how we view the world (even markets). (I always preferred City of London - the old square mile - vs the new Canary Wharf buildings etc.)

Gyve Bones writes:
H.L. Mencken wrote about this in the Baltimore Evening Sun, and the column was included in his Prejudices: Sixth Series (1927):

I have seen, I believe, all of the most unlovely towns of the world; they are all to be found in the United States….Here is something that the psychologists have so far neglected: the love of ugliness for its own sake, the lust to make the world intolerable. Its habitat is the United States. Out of the melting pot emerges a race which hates beauty as it hates truth.

Nils Poertner responds:

imagine people would slow down a bit in their lives and appreciate some of the better architecture (it is not that we don't have it).

Larry Williams differs:

Right! Americans love ugly, hate beauty …that’s why we go to the Grand Canyon, Glacier, Yosemite, the beaches, and have great museums. Mencken must have had a very long nose to look down upon.

William Huggins comments:

Best view on neoism was Chris Beckwith in Empires of the Silk Road: A History of Central Eurasia from the Bronze Age to the Present where he identified the problem as the belief in constant revolution, that there was no future unless the old was destroyed. This morphs into a fetish for the new, regardless of its merit. He clearly loves the classics and hates to communists for their desire to cast aside beauty for revolutionary.

Dec

17

is as good/bad for the economy and stock mkts (as leading econ) as being sober is for the alcoholic. credit mkts will not like deflation.

Eric Lindell responds:

deflation poses the same problem as inflation — introducing random noise into the price system. With stable prices, producers know that a price increase signals increased demand for a product. Von Mises compares inflation to running someone over and deflation to running him over backward. January 2014 was the only deflationary month in recent years. Deflation as cure for inflation is bad mathematics.

H. Humbert asks:

But there is no deflation. Other than the Walmart CEO talking about some possible food deflation (which is not deflation overall) who has any original information that deflation is likely?

Eric Lindell responds:

Re MV = PQ, deflation would accompany decreased money supply/velocity or in increased output.

H. Humbert replies:

That's true, but not in itself predictive. Will any of these things occur and be strong enough to matter? All that can be said now is that there seems to be some evidence of disinflation, not deflation. I'll believe deflation overall when I'll see it.

William Huggins writes:

the reason we aren't likely to see it is the totem power of irving fisher who taught generations of american economists that deflation led to an activity-suppressing feedback loop. far be it from me to opine on the well-regarded analysis of a seminal thinker (for several other reasons), but it may be worth noting the source of this deeply held belief. as a result of fisher's expert authority, particularly among other influential economists like friedman, the view is profoundly held by today's cadre of central bankers whose playbook warns them that deflation will lead to the great depression pt 2.

historically, the US had a notable 20 year run of deflation in the late 19th century and the economy at the time was soaring. (very) reasonable arguments can be made for confounding factors like mass land seizures, new tech, reconstruction, immigration, etc at the same time but to bring it back to the basic monetarist framework (assuming stable V during the period), the economy could have simply been expanding faster than the money supply. the big difference with today is that the money supply has been untethered from physical constraint. combining (potentially) limitless quantity with a dread of not having enough pretty much assures the outcome.

interesting question arises when one thinks about palindrome's reflexivity theory, where systematic incorrect beliefs start to create new (unsustainable) realities that seem to defy physics and then burst suddenly. are the CBs doing enough to trim their BS and get the money supply under control? (M2 drifting back to that 6% annual growth since the 90s) but will the fear of deflation drive us too far in the other direction?

H. Humbert comments:

It's an interesting coincidence that the belief that deflation is bad for highly technical economic reasons that have nothing to do with unsustainable money printing, coincided with inflation being useful when said money printing occurred.

What Irving Fisher was evidently saying was that deflation is bad because it suppresses economic activity through some sort of a feedback loop. I think the deranged animals that advocate (or justify or fight any attempts to control) the kind of deficit spending that we have given the debt that we have don't like deflation because it would cause them to have to stop the spending a couple of years sooner than otherwise, hence they would lose their hold on power that much sooner, and that's all that they care about. Irving Fisher is described thusly in his wiki page:

Irving Fisher (February 27, 1867 – April 29, 1947) was an American economist, statistician, inventor, eugenicist and progressive social campaigner. He was one of the earliest American neoclassical economists, though his later work on debt deflation has been embraced by the post-Keynesian school. Joseph Schumpeter described him as "the greatest economist the United States has ever produced", an assessment later repeated by James Tobin and Milton Friedman.

So it's an interesting coincidence that the some progressive social campaigner economist found through his incredibly insightful, but totally politically unmotivated, theoretical work a formula that the animals need to stay in power.

William Huggins responds:

exactly - they will either inflate it away, or at some point engage in a selective default. that said, societies can go on self-financing for a very long time (japan) as much of that interest is being put right back in the pockets of americans. its not like the wealth is being disintegrated, its simply being moved around. i have no idea how to gauge the limit.

i wouldn't be so quick to dismiss Fisher's work simply because you dislike "animals" who are actually your fellow countrymen whom you disagree with (do americans really hate one another so much? is there another reflexive breakpoint that's much more important to watch for?).

my point was that he was very wrong about the 1929 crash and I believe his losses must have set a terrifying fear upon him when the markets didn't bounce back. hence deflation as his bete noir, not some silly "convenience" for politicians who weren't even a dirty twinkle when we wrote. the issue is inherited wisdom being unbalanced, not conspiracy most foul.

H. Humbert replies:

You may very well be right about his motivation, I just found it interesting. I hate inflation because it's unfair to people who are good, who behave according to what I consider to be good moral principles. It also hurts many who are weak, whether through no fault of their own or otherwise. But those I call animals talk about any feeble attempt to restore sanity to the budget as an attempt to simply stop the government from functioning, just because those who attempt it are somehow motivated by evil intent. Lying to keep power while destroying the country is despicable behavior.

Dec

17

Thanksgiving menu at the Plaza Hotel, 1899.

From the NYPL collection of menus.

H. Humbert comments:

All under a dollar. Special holiday dinner for well-to-do customers. Anyone wants to make the case that those who deliberately cause deficit spending are not deranged animals? Is this price change good? Milei just said he will abolish the Fed of Argentina. Non negotiable. Of course he didn’t kill himself, I mean if there are ever any health problems in his immediate future.

Stefan Jovanovich offers:

The BW recommends Turback's book, What a Swell Party It Was!: Rediscovering Food & Drink from the Golden Age of the American Nightclub; it has menus and venues from the great age of actual fun and dancing.

William Huggins writes:

looks like every single government since the 1950s were full of "animals" - not a single one seems capable of maintaining a surplus for more than 3 years (and that was Clinton…):

United States Federal Government Budget

Andrew Aiken adds:

There was never a surplus in the 1990s, at least by the accounting principles that a business is required to use. The “surplus” was entirely due to short-term overages in payroll taxes for Social Security, and they were wasted and not used to shore up the system.

Stefan Jovanovich comments:

Since the purpose of central banking is to allow legislatures to increase their debts, is it surprising that "deficits" are now the cultural equivalent of what "sin" was in the ages when most everyone went to church? Everyone is against it, in principle, but not where principal and interest are concerned.

Larry Williams applauds:

+10 QUOTE OF THE DAY!!

William Huggins responds:

i wouldn't say the "purpose" of centrals is to enable money printing, rather I would say that's how governments prefer to use centrals but since the last of the independents were taken over by the end of WW2, that may have become an irrelevant distinction in the modern world. the main reason for pointing it out is that we could easily return to a world without state controlled centrals and their purpose would be notably quite different (usually running the payments system, think Amsterdamsche Wisselbank).

Stefan Jovanovich replies:

The Federal Reserve does not print our money; the Treasury does. In allowing its member banks to hold Federal government IOUs at par as their reserves, our central banking system effectively outlaws the pricing of all legal tender. Actual money can only be exchanged for itself, whatever the amount. The result is a wonderful inversion of monetarism as a theory. Money can be printed, without limit, but only if Congress votes to expand the supply of collateral that the banks can buy and endlessly rediscount.

William Huggins disagrees:

this is incorrect - the Fed can and does use several other assets aside from federal government debt to back its liabilities. back in 2010, they held more mortgage debt than government debt. the choice of backing asset is often dominated by gov debt but the BoJ (among others) is also sitting on corp debt (and equity for that matter)

Peter Penha writes:

I disagree and it is because of who is on the hook first. The Federal Reserve can only purchase government guaranteed debt for its account (including FNM FRE GNMA which it did in GFC and in amounts greater than existed - the w/i mtge owed the Fed at one point was around $1 trillion and at a spread below treasuries when adjusted for the embedded prepayment option by the borrower.

All the MS pledging boxes of toilet paper at the Fed window in late 2008 & the HY ETF purchases in March 2020 were against a Treasury guaranteed account at the Fed. If you care to argue that in difficult times there is no difference between Fed & Treasury as the Fed takes orders, that there is a myth of central bank independence - no argument.

The Fed now losing some $200 billion a year from it asset/liability mismatch is putting those losses against a future Treasury payments owed account - so the Fed does not need a capital call from its losses. If however the Fed decided it did need capital - that gets taken from its shareholders who are the money center / fed member banks. JPM is on the hook for Fed insolvency (or BAML and C trading below book tell you they will be forced sellers of equity below book to shore up their capital).

Perry Mehrling (the professor Zoltan wishes he had had in college) does a great history course (and free) on the hierarchy of money, and how private (CHIPS) and public (Fed Wire) clearing houses are allowed to create credit out of thin air to make up for shortfalls - guaranteed by all the other members.

Your money deposited in the bank is not money it is you extending credit to the bank and an IOU (down the tier). In normal times they all appear equal and settle normally but a Eurodollar is not the same as a dollar (see SVB dollar deposits made whole / offshore SVB deposits a general creditor (gone) as per the FDIC statement on SVB).

Stefan Jovanovich suggests:

Money and Empire: Charles P. Kindleberger and the Dollar System

Nov

16

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

Nils Poertner writes:

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

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

William Huggins comments:

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

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

Nils Poertner adds:

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

Humbert H. asks:

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

Nils Poertner replies:

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

William Huggins expands:

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

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

Henry Gifford writes:

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

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

Art Cooper adds:

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

Humbert H. responds:

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

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

Henry Gifford continues:

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

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

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

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

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

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

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

Larry Williams writes:

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

Zubin Al Genubi adds:

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

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

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

Rich Bubb comments:

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

Pamela Van Giessen writes:

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

Rich Bubb recounts:

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

Steve Ellison understands:

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

Richard Barsom offers:

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

Oct

28

It seems a misnomer to call longs bonds risk free. Indeed the default risk is near zero, but the interest rates risk is wilder than a bronco at Montana rodeo. Credit risk is also a factor with potential downgrades. Which begs the question will risk premiums decrease equity vs bonds. Which asset class is actually carries more "risk"" on an annual basis.

Big Al asks:

Are long bonds (UST 30s) referred to as "risk free"? I think of the "risk-free rate" as Treasury bills. Whereas with bonds, doesn't longer duration equal greater risk?

William Huggins responds:

the risks of a long-term contract are mostly in getting out early at a bad time (and thus having a holding period yield lower than YTM), default, and of course inflation. if you hold to maturity (liability matching for instance) then the first risk vanishes but the last two remain. in gov bonds, the second risk also vanishes but the third becomes all important since a gov can promise to give you 1000 currency units but makes no reps about what that will buy at maturity.

Hernan Avella writes:

Interest rate volatility is only a problem for people who don't know how to immunize the risk. One should always match the investment horizon to the duration of the bond holdings. To quote Campbell and Viceira:

In financial economics a one-period indexed bond is usually thought of as riskless. Over one period, a nominal bond is a good substitute for an indexed bond, and thus by extension the riskless asset is often identified with a short-term nominal asset such as a Treasury bill. In a world with time-varying interest rates, however, only the current short-term real interest rate is riskless; future short term interest rates are uncertain. This makes a one-period bond risky from the perspective of long-horizon investors. For such investors, a more natural definition fo a riskless asset might be a real perpetuity, since this asset pays a fixed coupon of one unit of consumption per period forever.

In practical terms, given that we do live in the most powerful country in the history of the world and this country issues indexed bonds. For a long term investor, a TIPS ladder to finance your long term consumption is the riskless asset. Which should be 100% of the portfolio of the infinitely risk averse investor with zero intertemporal elasticity of substitution.

Kim Zussman reflects:

The most risk-free state is death because nothing worse (or better) can happen to you. Less severely one likes to lay on the floor. The cool hard surface is good for back pain and there is no further to fall.

Oct

12

Wall of worry

October 12, 2023 | Leave a Comment

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

H. Humbert comments:

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

Zubin Al Genubi sees the bright side:

Excellent wall of worry.

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

(Really stupid)

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

Laurel Kenner writes:

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

Humbert H. comments:

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

Laurel Kenner replies:

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

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

Larry Williams doesn't mince words:

This is bullish.

Humbert H. comments:

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

William Huggins writes:

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

Aug

13

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

William Huggins responds:

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

Larry Williams replies:

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

John Floyd writes:

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

Larry Williams responds:

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

Stefan Jovanovich writes:

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

H. Humbert comments:

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

Larry Williams disagrees:

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

Nils Poertner writes:

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

Larry Williams responds [tongue in cheek?]:

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

Big Al posits:

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

John Floyd writes:

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

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

Larry Williams responds:

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

Stefan Jovanovich offers:

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

Their August 2023 reading of the UIG

Bud Conrad writes:

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

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

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

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

Summary differences from common beliefs:

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

2. Cutting inflation requires less government deficit.

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

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

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

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

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

Zubin Al Genubi comments:

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

John Floyd responds:

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

Stefan Jovanovich adds:

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

Jul

29

I see in media and real life so many people from Latam trying to get to the US (or Turkey to Europe). that said, local stocks indices and currencies of those regions perhaps present the better options than the US or European mkts? Check out some of the Brazilian stocks yielding up 20pc and lowly valued (trap?) - also Brazilian Real vs USD (or Turkish Lira vs Euro). Just an idea could be half-baked at this stage.

Hernan Avella responds:

Right now Latam represents a minuscule portion of the market cap of international markets, which itself is about 40% of world equities (float adjusted).

Chile .2%
Mexico .8%
Brasil 1.5%

This becomes a highly idiosyncratic bet, mostly on the currency. Unless you have some special edge, it's not a risk you are compensated for.

Nils Poertner replies:

maybe some of the indices can be looked at, and over time one can develop a bit of expertise, too. I kind of like the idea that Latam as a whole remains in a sort of chaotic state. unpredictable and a bit dangerous too. it works a bit as an entry barrier (not for all, but for some).

William Huggins offers:

jacob shapiro of cognitive investments does a good job following latam markets, which could help build some of that expertise over time. they have a free geopolitical newsletter each week with a macro edge to it. he used to have a latam focused newsletter but there wasn't enough uptake apparently.

sample of recent newsletter:

Brazil’s lower house approved a proposal to overhaul the country’s tax rules. Lawmakers voted 375-113 to advance the bill in a second round of voting. The plan still has many hurdles to clear. As a proposed constitutional amendment, it must win two votes in the Senate, and may have to return to the lower house in the second half of the year if senators make changes to the bill, as Speaker Arthur Lira expects. We expect it will happen. Indeed, I can safely say that we are the only geopolitical and macro sources I know of that has been talking about the importance of Brazilian tax reform — both to Brazilian voters and to the trajectory of the Brazilian economy — with such depth and passion. All credit to @Rob Larity here who has been on this from the beginning. De Gaulle was purported to have said, “Brazil is the country of the future…and always will be.” It’s not clear he ever said exactly that, but more important is that the future looks like it is finally here.

John Floyd comments:

Valuations in equity, Valuations in FX, Idiosyncratic commodity drivers, Brazil softs, etc. Political slide left all around, Monetary cycle was first mover up and now first mover down is a tailwind, reshoring FDI flows in Mexico (I know NA and not LatAm). Low index weights does indeed limit some larger flows.

A few liquid country ETF’s or ADR or local expressions of views available. Always the episodic risk both ways. lets see how Argentina may play out next 6-24 months for example.

Nils Poertner writes:

In a way, those countries are good to study for a number reasons. in a way they remind me of the future of US and Europe (money printing, elites playing ever more shenanigans, ordinary people not sitting in their own seats, completely hypnotized what is front of them, endless distractions). re investing/trading- yes, ever-changing cycles - I agree.

Jul

14

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

Hernan Avella disagrees:

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

Stefan Jovanovich offers:

Edward Chancellor interview

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

Kim Zussman adds:

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

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

William Huggins responds:

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

Zubin Al Genubi reminisces:

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

Nils Poertner offers:

Big investors rush into bonds after ‘cataclysmic’ year

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

Henry Gifford writes:

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

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

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

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

Nils Poertner responds:

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

Mar

24

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

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

William Huggins adds:

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

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

Jeffrey Hirsch responds:

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

Laurel Kenner writes:

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

Pamela Van Giessen responds:

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

Big Al suggests:

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

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

Penny Brown writes:

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

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

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

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

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

Gary Boddicker adds:

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

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

Gyve Bones responds:

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

Dec

27

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

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

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

Larry Williams responds:

The actual economy down but not out or negative:

Gary Phillips replies:

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

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

Read the full discussion here with additional contributors and charts.

Dec

7

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

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

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

William Huggins responds:

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

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

John Floyd writes:

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

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

Zubin Al Genubi adds:

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

Paolo Pezzutti comments:

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

Nov

17

FTX surprise

November 17, 2022 | Leave a Comment

H. Humbert writes:

I find it amazing that an exchange with monopolistic market making, and no Manning Rule equivalent can ever lose money. As bad as stealing customer funds to cover trading losses sounds, I wonder if there's even worse to come because it sounds so incompetent. However, once again the value of crypto to nefarious actors is demonstrated by the 'asset classes' anti-fragility. Some flavor of the notion of honor among thieves.

Zubin Al Genubi replies:

Market makers can't handle big fast moves, of which we've seen some breathtaking one recently. I believe they are caused in part by the market makers and the ones who are just a bit slower get eaten by the lion. Of course this is sheer speculation on mu part.

H. Humbert comments:

With respect, your model of what a market maker is hasn't existed for about 15-20 years. Market making today is machine driven, speed of light kind of thing, and balanced/correlated across a firm's book. It is almost touchless for the most part.

So for example, if you are a Manning-Rule-free exchange, and you have your own internal market making operation that sees the flow first, you can, at the speed of light, see the direction of the order flow, front run it, sell into it, take the other side of the stupid trades ie the trades that are 'random' going against the flow that you are seeing, see the limit orders and the stop orders and run those etc etc. You see the flow first and decide how to execute against or with it or pass to the punters on the exchange.

It seems impossible to lose money at this and if you don't believe me, look at how few losing days Virtu and Citadel put up and they only get to see about 90% of just the retail flow in equities and they generally can't front run it. They can only decide if they want to take the other side or pass the order on to the market. Imagine if you had no fiduciary responsibility at all and no any kind of rule of best execution.

Anyway I go on and on, but point is, that FTX's Alameda lost money and a lot of it is very strange. Also, I should add, that I know absolutely nothing about crypto.

I can't help but notice that another of Vic's flags is prominent in this FTX story, and that's all the charity work they were doing. All while seemingly running some crazy embezzling thing to cover what? How were they generating these huge losses?

I knew a living human market maker at Schwab in the dot com era. His boss took and traded a single security(I won't name it) and split the rest of the book up. My living human associate got like m-z or something and one day he's long a zillion XLNX. Supervisor screams at him 'What are you and ANAL-IST?"–meaning what ever you think you know, get back to making markets and leave the positions to the buy side suckers. So maybe the losses are from directional market supporting efforts or some such.

Zubin Al Genubi suggests:

Maybe machine/com speed now determines winners?

William Huggins agrees:

can't see why that wouldn't be the case. on a precisely related note, a friend (ex-mit) gave a talk on algos in finance a decade ago, noting at one point how buildings were then being hollowed out to reduce microseconds of lag (i start the clip where its juicy).

H. Humbert writes:

This is one issue with co-location of servers at the exchanges, why it costs so much, why IEX markets a 200ms 'speedbump' to protect resting orders, why dark pools offer some very strange order types, etc etc but ultimately, the winners and losers imo, are determined by rent seeking in the regulations. Ban payment for order flow and Virtu disappears, ban internalization and Schwab has to charge commission, make best execution mean best possible all in price at the moment the order is received and all brokers will institute intermarket sweeps and order flow will go to exchanges, etc.

Stefan Jovanovich comments:

I hope H. Humbert will agree with this comment from the financial bleachers. The anti-trust laws, including agricultural marketing restrictions, have offered the same opportunities for rent-seeking around regulation without having any of the pushback from innovation - i.e. new and better ways to game the system. So, we have an age of inflation at the same time transaction and carry costs for retail customers have gone steadily down.

Duncan Coker writes:

This is a great description of the rent seeking infrastructure or "top feeders" as vic would say. It is all sell-side as that is where the stable income resides. Still as a lowly buy-sider if my choice is to get fleeced by the exchange/locals or the hft hedge funds I think I would go with the later. At least the hedge funds are competing against one other to steal from me. Don't even get me started with the wirehouses. Used to be 100 bp to execute/clear a trade back in the 80s, off exchange that is.

H. Humbert replies:

In the US equity world, which is the only thing I know anything about, the issue that that the HFT shops segment the order flow into smart and dumb and pay for the dumb order flow, which they get first look at and first dibs on off-exchange - through FINRA, which has it's own rules on order handling.

Segmenting the flow makes the rest of the market(not the internalizes, not the payment for flow(PFOF)), both lit and dark, more toxic in terms of adverse selection to resting quotes. This widens the spread, which makes internalization/PFOF more profitable - virtuous cycle kind of thing and also increases the concentration of who gets to see the flow first and decided where to fill.

Given the midterms, I think Chair Gensler has enough political capital to push through some of the rule changes he's been talking about: “Competition and the Two SECs” Remarks Before the SIFMA Annual Meeting

To me, the most likely significant change to get through easily is SEC's own Best Execution rule(amazing I know that there is none currently) and that could dramatically change where orders get filled. We'll see.

Oct

5

In What Computers Still Can't Do: A Critique of Artificial Reason Hubert Dreyfus argued that an important part of human knowledge is tacit. Therefore, it cannot be articulated and implemented in a computer program.

first book was written in 1972. true back then and true today despite what others want to tell us. don't need a nano-second to know this by heart.

Zubin Al Genubi adds:

My theory is computer algos leave trails.

William Huggins agrees:

they always do. a friend who was at MIT for a few years had an interesting talk on algos and the firms tracking/hunting them.

Sep

16

Talking with strangers is surprisingly informative

"anybody knows more about something than you do"

Significance

Conversation can be a useful source of learning about practically any topic. Information exchanged through conversation is central to culture and society, as talking with others communicates norms, creates shared understanding, conveys morality, shares knowledge, provides different perspectives, and more. Yet we find that people systematically undervalue what they might learn in conversation, anticipating that they will learn less than they actually do. This miscalibration stems from the inherent uncertainty of conversations, where it can be difficult to even conceive of what one might learn before one learns it. Holding miss-calibrated expectations about the information value of conversation may discourage people from engaging in them more often, creating a potentially misplaced barrier to learning more from others.

Zubin Al Genubi agrees:

I've noticed people don't listen well. They often like to talk. Its good to listen and encourage others to talk and they think you are a great conversationalist. As Yogi Berra said, Listen and its amazing what you can learn. I have some good ideas but no one listens to me.

William Huggins adds:

2018's Nobel in econ went out (in part) for the endogenous growth theory, which posits that a good part of economic growth that isn't "more people" or "more kit" comes from the positive externality associated with education. Romer basically says that once someone learns how to do something better, we gain by having them tell us about it. people uncomfortable with updating their beliefs might avoid conversation and lose out as a result (value of keeping an open mind?)

Nils Poertner writes:

deep down it is probably that we are so excited about our own ideas (whether adequate or not) - that we often over-sell it to ppl in our own social circle. mea culpa. whereas with strangers it is often more a light touch - or an encounter that lasts a few minutes only and this lightness creates a magic…and a sparkle and that is all that is needed sometimes.

Gary Phillips expands:

I've always been a gregarious person, not because I am socially needy, but because I often find conversations with strangers to be an edifying experience. Quite instinctively I gravitate to the following people:

1) smarter / better educated individuals - if you're going to converse with someone, you might as well learn something. I love talking with my friend David, who is a Lubavitch rabbi. His knowledge of the Talmud is extraordinary, and its analogs to trading are remarkable.

2) older people - experience has given them a rational perspective on life and insights that are invaluable. My favorite encounter was with Lou Lesser, a L.A. real estate developer who was 93 when I picked him up in Beverly Hills and drove him to Laguna Beach. He regaled me with stories about his life, including personal experiences with Marilyn Monroe, John Kennedy, and Mickey Cohen. It was a ride I'll never forget.

3) tourists in the U.S. - talking with a 2 young ladies from Kyrgyzstan I met at a local bar in Chicago. Extremely intelligent and well educated, they were extremely critical of the lack of education and sophistication of the average American. They were completely shocked by Americans' lack of knowledge and ignorance of what lies outside of America. I was the only American they had met, who had heard of their country. Nevertheless, while they were very cynical, they were also beautiful, charming, and thoroughly engaging.

4) people from diverse and varied walks of life- if you are seeking a diverse experience with people of varying levels of social status, there's no place better than the joint. My 30 days spent incarcerated in the Montgomery County Correctional facility was not necessarily entertaining, but it was certainly educational. There's not much street cred to be earned jacking an O.G., so I was afforded a level of respect, and was able to engage and befriend various inmates, from incredibly disparate backgrounds and lifestyles.

5) people you meet while travelling- my favorite aspect about traveling is the ability to meet a wide variety of people. I have a tendency to let my guard down while traveling, and open up even more than usual. recent trips to Japan, Mexico, and Crete were made all the more enjoyable because of the people my wife and I interreacted with and met.

Kim Zussman responds:

Typically internationals - especially Europeans - look down on Americans in this way. As if the prize is not what you own but what (or who) you know (especially in France).

Funny thing is that in most countries outside the US wealth-generation efforts are futile because of huge governments and massive corruption. At least if smart people aren't allowed to become rich at least they can become educated, cultured, and erudite. Their educated-but-poor status is a consolation prize, and when they are here there is envy.

In the USSR the only wealthy people were in government or military - which is the same now with the addition of para-governmental oligarchs. You can be talented and work like the devil but if you're not connected you have to settle for Dostoyevsky and Dugin.

The problem with America is that, for the most part - less so in recent years - the main limit on your personal success is yourself. This is not very compassionate (elevation of failure), and is the fuel of socialism. We are ugly Americans for not expending formative decades on poetry, languages, and philosophy - but allowing people to compete in a quasi-free economy.

Pamela Van Giessen writes:

There are interesting people wherever you look for them. Especially in this day and age, no one place has a monopoly on interesting and clever.

Larry Williams agrees:

And they don’t have a clue where our state and cities are. Snobs for the most part Europe is not superior to much of anything other that Italian wine and food. It’s a worn out old lady that was beautiful in its day.

William Huggins asks:

Any Americans here happen to read Gustavus Myers America Strikes Back (1935)? He had a pretty savage takedown of European elitists that's heavy on economic history and well referenced. Much of the sentiment here echoes his charges.

Stefan Jovanovich notes:

Disdain for Americans at home and abroad is the oldest of all cultural traditions. It has survived the death of beaver hats, bustles and whist and shows no signs of decline. I think the scorn for Americans here in their own country has its root in bewilderment - how can all these fat stupid slobs have made their language and money the world standards for communication and exchange? Beats me.

Boris Simonder suggests:

A test would be to survey domestic population on domestic locations of cities/states. Who would do better since you mention location of cities/states? Jay Leno has some clips from his Walk of fame episodes.

High quality cars Larry, at least fossil, although EVs and H2 is up-coming and leading. Telecom networks, Beer, furniture design, clothing designs, Handbags/Cases, Trucks, Industrial/Electrical Machinery/Equipment, Pharma, Mineral fuels, Plastics, Optical/technical medical apparatus, Iron/Steel, Organic chemicals, Insulated wire/cables, Optical readers, Centrifuges, Electrical converters, Auto parts to name a few high value exports. EU accounts for approx 30% of total global export value. Just a tad more than Italian wine and food.

That old lady still has some of the most beautiful ones. Go visit Norway again.

Larry Williams responds:

I'll take the food! You can have the handbags and such.

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