Jan

6

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

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

Steve Ellison likes the idea:

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

Peter Ringel adds:

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

Dec

14

Wonderful example of ever changing cycles in the NBA vis a vis the post up play which went dramatically out of favor when analytics reshaped the game into a three point shooting contest but now has come back into favor due to the spacing afforded by all those three point shooters.

How post-ups became the NBA's most efficient play

Stefan Jovanovich comments:

The Jokic effect

Steve Ellison is wistful:

Might one dare to hope that actually putting the ball in play for fielders might once again gain favor in baseball?

Nov

21

Sheep needs to be regularly sheared to take off some extra wool- it is actually good for them- healthy!

Henry Gifford adds:

Back in the day sheep didn’t have people handy to shear them. A farmer told me that over the past few hundred years sheep have been bred to grow more wool, thus they need people now, but before that change the sheep didn’t grow as much wool.

Steve Ellison writes:

The S&P 500 reaching its lower 50-day Bollinger band on Thursday might indeed indicate some modicum of panic, as might VIX being well above its upper 50-day Bollinger band.

I have thought sentiment was quite restrained this year given that the S&P 500 was at a record high as recently as October 28. Bears have outnumbered bulls in the AAII survey for the past two weeks. And the publishing of a book titled 1929 was very well publicized. I perceive that out in the general population there is a lot of fear about AI; lots of scaremongering about AI eliminating nearly all white collar jobs.

Cagdas Tuna comments:

Many years ago when I was a teenager, I heard this from the head of top brokerage firm in Turkiye and he said "It is not news until it matters." Circle funding of AI companies and its effect on jobs have been long discussed at least by the people I follow on social media but it has had no impact until yesterday. So can we say it has become news now?

Nov

17

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

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

Steve Ellison responds:

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

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

Big Al wonders:

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

Nils Poertner remembers:

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

Nov

7

10 days since all-time high. very bullish.

Steve Ellison comments on CAPE:

[Click chart for original post on X.]

6637-6660 is an important level for the ES December contract; not breaching this level (yet) in today's selloff is short-term bullish in my opinion, but the second highest valuation in history means the longer-term risk is high.

And I'm not sure exactly what the "rolling historical average" is, but by my calculation, the 30-year average CAPE is 28, which might make 40 somewhat less overvalued.

Vic's X/twitter feed

Oct

24

Grok and I have produced this summary of the growth of the electric utilities industry in the United States from 1910 to 1930. [Click on chart for full view.]

Bud Conrad comments:

Not sure what you take from this data. Electrification was probably more important than AI. Its growth rate was big at first in %, but slowed. Recessions were big downturns. What do you apply to today?

Steve Ellison writes:

My grandmother was a telephone operator in the 1920s. It was a high-tech industry at the time.

Carder Dimitroff clarifies:

The definition of an "electric utility" changed over time.

Big Al suggests:

An excellent series available on Prime:

Shock and Awe: The Story of Electricity

Professor Jim Al-Khalili tells the electrifying story of our quest to master nature's most mysterious force: electricity.

Books I haven't read yet, which get lots of stars:

The Power Makers: Steam, Electricity, and the Men Who Invented Modern America

The power revolution is not a tale of machines, however, but of men: inventors such as James Watt, Elihu Thomson, and Nikola Tesla; entrepreneurs such as George Westinghouse; savvy businessmen such as J.P. Morgan, Samuel Insull, and Charles Coffin of General Electric. Striding among them like a colossus is the figure of Thomas Edison, who was creative genius and business visionary at once.

Empires of Light: Edison, Tesla, Westinghouse, and the Race to Electrify the World

In the final decades of the nineteenth century, three brilliant and visionary titans of America’s Gilded Age—Thomas Edison, Nikola Tesla, and George Westinghouse—battled bitterly as each vied to create a vast and powerful electrical empire. In Empires of Light, historian Jill Jonnes portrays this extraordinary trio and their riveting and ruthless world of cutting-edge science, invention, intrigue, money, death, and hard-eyed Wall Street millionaires.

Oct

3

Zero sum game: for every $ that wins the same amount will be lost. REALLY? you bought at 7 sold to me at 10 I sell at 20 and the contract goes off the board and delivered at 22 who lost? We lost that we could have made more $$ but where is a net loss?

Steve Ellison comments:

Adverse selection can make us all feel like losers. If I sold at 10, I should have held to 22. Or I should have put on more size. If I bought at 7, and it went to 5, that would have been even worse.

Jeff Watson goes literary:

But Yossarian still didn't understand either how Milo could buy eggs in Malta for seven cents apiece and sell them at a profit in Pianosa for five cents.

[ … ]

Milo chortled proudly. "I don't buy eggs from Malta," he confessed… "I buy them in Sicily at one cent apiece and transfer them to Malta secretly at four and a half cents apiece in order to get the price of eggs up to seven cents when people come to Malta looking for them."

"Then you do make a profit for yourself," Yossarian declared.

"Of course I do. But it all goes to the syndicate. And everybody has a share. Don't you understand? It's exactly what happens with those plum tomatoes I sell to Colonel Cathcart."

"Buy," Yossarian corrected him. "You don't sell plum tomatoes to Colonel Cathcart and Colonel Korn. You buy plum tomatoes from them."

"No, sell," Milo corrected Yossarian. "I distribute my plum tomatoes in markets all over Pianosa under an assumed name so that Colonel Cathcart and Colonel Korn can buy them up from me under their assumed names at four cents apiece and sell them back to me the next day at five cents apiece. They make a profit of one cent apiece, I make a profit of three and a half cents apiece, and everybody comes out ahead."

Sep

23

health care costs, our Achilles heel.

Health Insurance Costs for Businesses to Rise by Most in 15 Years
Insurers say that the rising premiums are driven by growing healthcare costs

(on a personal note: no-one is really fully healthy, not even kids normally! science uses a lot of Aristotelian logic (which is an either/or logic) but there are limits to it - and we take it way beyond its usefulness. Nature does not have those clear mental compartments - it is way more fluid /dynamic).

Steve Ellison writes:

Until the public announcement that Warren Buffett had bought shares in UnitedHealth, health care was by far the worst performing of the 11 S&P 500 sectors in 2025.

Nils Poertner responds:

Yes, the whole sector / subindex looks bullish (XLV). (the type of logic in the West (logic from Aristoteles) that dominates MODERN SCIENCE cripples our society. Why? Because in many cases, whatever the doctor says, "it is not" - it is only an image of something abstract (like the apple painting by Rene Magritte).

Pamela Van Giessen comments:

We overconsume healthcare because we pay so much for insurance and/or our employers give it to us in lieu of salary so we want to get all we can for “free.” We’ve been conditioned to believe that if we visit doctors (though now we see PAs) and get “check ups” and “tests” regularly and take pills to manage our bodies and minds in perpetuity that we won’t get seriously ill. Has got to be the biggest subscription scam ever perpetuated on a society.

Perhaps some spec would like to pull out the data and do some forensic financial analysis of all those hospital system balance sheets. I think that fully 1/3rd or more of hospital systems are owned by private equity firms and the bulk of non-profit hospital systems are extracting meaningful sums from the business regardless of how “healthy” their margins look on their financial statements. From an equity perspective the biz may have looked lousy but I can promise that it is extraordinarily profitable for the inside players.

Jeffrey Hirsch adds:

Not only is it a total scam, but it gets in the way of real needed pharmaceutical/medical care and completely ignores metabolic healthcare via lifestyle and diet changes.

Too bad RFK is all wrapped up in his vaccine crusade to focus on the real USA health crisis with obesity and metabolic health, which causes diabetes, heart disease, cancer and cognitive decline. I think the covid vax is total BS as are others. But MMR and most childhood vaccines save lives. We had a measles outbreak in Rockland County a few years back because some communities did not vaccinate.

We should also flip the old USDA Food upside down. The chart is from my Doc’s paper. And my doc's site is Dr. Tro Kalayjian).

Sep

19

This is a bit disturbing: According to classic Dow Theory, the Transports have not confirmed any new highs in the Industrials since November 25, 2024. If fewer goods are moving, is the economy really growing?

Aug

31

George Pólya came up with the term Inventor Paradox.

Basically, if one thinks about a problem more deeply, something else may open up. And one can achieve extraordinary results! Plenty of examples in finance, engineering, medicine.

Steve Ellison writes:

From the Wikipedia link about the inventor's paradox:

When solving a problem, the natural inclination typically is to remove as much excessive variability and produce limitations on the subject at hand as possible. Doing this can create unforeseen and intrinsically awkward parameters.

Very interesting idea with applications in many fields. As one example, I recently told my daughter, who is a partner at Boston Consulting, that I was reading a book about strategy by a professor at Harvard Business School. She told me, "Boston Consulting literally wrote the book on strategy": Your Strategy Needs a Strategy.

I ordered that book and so far have read the first chapter. One of the key questions is how predictable the business environment is. Another is, how much can you influence the environment? "Classical strategy" as taught in business schools generally assumes that the environment can be forecast and that the company has very limited influence over it. A case study was the Mars candy bar company.

But if you cannot forecast the environment, a very different approach is called for, with heavy emphasis on learning and iterating. And if you can in fact shape the business environment, you might want to find some partners and create an ecosystem.

As a footnote, the book I was originally reading, which I also found informative, was by Richard Rumelt: Good Strategy, Bad Strategy.

Asindu Drileba offers:

Optimize the Overall System Not the Individual Components, interview given by Edwards Deming. Excerpts:

The results of a system must be managed by paying attention to the entire system. When we optimize sub-components of the system we don’t necessarily optimize the overall system.

Optimizing the results for one process is not the same as operating that process in the way that leads to the most benefit for the overall system.

Applied to markets:

- It's easier to do well on the S&P 500 index (the general market), than do well in a single stock (picking).

- Attributed Mark Spitznagel, we should judge the buying of far OTM puts based on how they help the entire portfolio. Not the individual PnLs of buying the far OTM puts.

- Attributed to Roy Niederhoffer, many traders turn off trading strategies once they start loosing money, but different trading strategies make money at different times.

Aug

26

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

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

Steve Ellison adds:

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

Aug

14

The Laws of Trading: A Trader's Guide to Better Decision-Making for Everyone

This is a book about decision-making through the lens of a professional prop trader. For years, behavioral and cognitive scientists have shown us how human decision-making is flawed and biased. But how do you learn to avoid these problems in day-to-day decisions where you have to react in real-time? What are the important things to think about and to act on?

Aug

2

Originally posted May 2, 2009:

Einstein purportedly said that compound interest was the most powerful force in the universe. I challenge his statement and offer the hypothesis that the vig is the most powerful force in the universe, exceeding that of even free market forces because it's always there. Exerting a constant force on every trade, transaction, purchase, sale, or any human activity of any kind, the vig is always first in line to get paid.

The vig is a powerful enough force that both winners and losers pay, without even realizing it in many cases. The vig has clever ways of hiding and disguising itself but is always there. From the widening and narrowing bid/ask spreads in the market, to the 35 to 1 (or even more insidious 35 for 1) payout on a single number on the roulette wheel, the vig constantly grinds out and extracts it's percentage on every trade or activity. Like the steady beat of a metronome, the vig is just extracted, extracted, and extracted some more.

The general public has little awareness of the vig, but the vig takes a huge toll from the unsuspecting public. All of the great deals offered the public generally have a higher vig, although even the professionals must pay it. Games with longer odds such as trifecta pools, keno, and lotteries charge high vig, while short games and trades usually have much lower vig. Games that advertise that they're commission free usually charge the highest vig of all, such as those bucket shop Forex places that are sprouting up like mushrooms all over the place. The vig allows the beautiful Vegas casinos to exist, Churchill Downs to run it's card, and allows the temple at Wall and Broad to continue it's operation day and night.

I contend that although the electronic trading is supposed to increase liquidity and eliminate the vig charged by the locals, thus benefiting the public, the opposite occurs. The apparent percentage takeout of the vig might be reduced, but the increase in the velocity of trading, with a smaller vig collected each round trip, more than makes up the difference, sort of a Laffer Curve applied to the vig.

One can easily see this by looking at the volume and revenues at places like the CME where volume has exploded and the market cap of those high temples of finance has gone into the stratosphere. Those beautiful buildings have been built by the pennies per transaction takeout from everyone, every trade, and it all adds up. The apparent reduction of vig has allowed the online poker sites to flourish with advertised low rakes versus the brick and mortar clubs. People think they're getting a great deal with such a low rake but don't realize that they're playing at a rate six times faster than in real life and probably paying out more vig than they would in Vegas, Atlantic City, or the numerous underground clubs I used to frequent in my misspent youth.

Although the vig is a constant fixed percentage in sports betting, in the markets it is ever changing. With the advent of the electronic markets, I have a certain difficulty these days in calculating the amount of vig I pay every trade, although I have a general idea. I have some pretty sophisticated math that's supposed to help me figure out the vig I pay, but even that's just an approximation When I was a local, I knew how much vig I collected down to the quarter cent depending on what type of trade I was accepting. I collected a certain amount of vig buying a spread, selling a spread, trading with little locals, and fading paper from the public. I offered discounts in vig for size, and would give up a quarter cent if I knew I could bag a big order. I also knew how much vig I would have to pay and the percentage that might change if I were desperate enough. Even though I collected vig every day, I also knew how precisely much vig I would have to fork over at the end of the day to play in the pit, because everybody has to pay tribute to someone. Since every player pays vig in trading, the money has a way of working it's way up, to some unknown repository somewhere. All of this paid tribute and upward movement of money feels like it has a part in a certain Francis Ford Coppola movie that was so popular in the 1970's.

Free market forces do affect vig, widening and narrowing the percentage, but while free market forces might disappear for awhile due to governmental regulations and laws, the vig will always be around. Vig shows up in many other clever disguises such as lower yields on fixed investments, taxes, assessments, points, fees, payoffs, and graft. Vig has to be calculated into every transaction, and must be figured into every apparent overlay one might spot.

My late, great, grandfather used to cite the old axiom that "There's two kinds of people in this world, those who pay interest and those who collect interest." While he was spot on with reciting that observation, he sadly neglected to tell me that everyone has to pay vig, a hard lesson that I had to learn for myself.

Steve Ellison writes:

A traditional recipe for business success: reduce the price of a product and thereby generate much greater demand and higher profits.

Aug

1

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

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

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

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

Big Al writes:

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

Henry Gifford suggests:

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

Steve Ellison responds:

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

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

Peter Ringel writes:

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

Vic simplifies:

just trade once a quarterfrom long side

Zubin Al Genubi comments:

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

Jul

28

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

Steve Ellison comments:

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

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

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

Peter Ringel writes:

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

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

Jul

19

For those who study such data, here’s the 2025 Big Mac index.

The Big Mac Index, a real and recognized metric developed by The Economist magazine in 1986, initially served as a light-hearted tool to measure purchasing power parity between countries. Today, it has evolved into a significant indicator of the global economy and currency valuation. This index compares the price of Big Macs in various countries to the price in the United States, offering insights into economic conditions.

Steve Ellison writes:

I love the Big Mac Index. But inquiring minds want to know, what about the eurozone, conspicuously missing from the article? The Big Mac Index judges the euro to be 15.2% overvalued, so this year's runup in EUR/USD appears not to be supported by burger fundamentals.

Jul

15

The rules for American warfare are painfully simple: we win the ones that other people start, and we lose the ones that we start. Today is the formal anniversary of the first loser war by the American Republic. Congress, at the urging of President Adams and his Secretary of the Navy, Benjamin Stoddert, revokes its treaty with France. Because the revocation put the country in a state of war with France but is not a formal declaration by Congress, our history books call it a "Quasi-War". Conventional history does its best to pretend that this was a success. History Today tells us "the Navy gained respect as a powerful force. It grew from a mere six vessels to about 30 commissioned ships. American warships captured more than 80 French vessels during the Quasi-War."

U.S. launches the Quasi-War with France, the first conflict since the Revolution

Total tonnage of ships captured during the Quasi-War
(the figures given are a range because the sizes of the individual ships captured have to be estimated; there are not enough surviving records to know how large each ship was.)

• American ships captured by French Navy: 200,050–400,100 tons
• French ships captured by U.S. Navy: 5,200–10,000 tons

We have better numbers for the the number of ships captured:

• American ships captured by French Navy: roughly 2,000
• French ships captured by U.S. Navy: 85-86

The American records are much more precise because the captures had to be valued; prize money was the incentive pay for the officers and sailors.

Steve Ellison writes:

Paul Johnson, in A History of the American People, wrote that Thomas Jefferson during his two terms as president was endlessly vexed by the depredations of both the British and French navies on American shipping. One wonders why we start any wars if we are guaranteed to lose.

Stefan Jovanovich responds:

The data for the war that the Democrat-Republicans (Jefferson and Madison) wanted and formally declared - the one that started in 1812 and is still looking for a name:

• U.S. Captures: 44,412–63,912 tons (200–250 vessels)
• U.K. Captures: 144,799–424,799 tons (1,406 vessels)

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

18

With long-term investors, short-term traders, trend-followers, mean-reversion advocates, and buy-low-sell-high activists all confident their strategy is superior and showing market success, is this evidence that all approaches work together, or does survivorship bias and misplaced confidence masks that no single strategy truly dominates in today’s volatile markets?

I’ve always been fascinated by the fact that there are investors holding forever competing with traders who do the complete exact opposite and usually one says the other person is an idiot and the same is the opposite haha. (The only time I think I’ve heard of someone praising another’s way of working which was totally opposite of his in this business, was the yearly speech of Buffett and Munger claiming Jim Simons and his team were very very smart.)

Steve Ellison responds:

There are different ways to find an edge in the market, so market participants behave differently. A market maker who uses order flow information behaves very differently from a fundamental investor who believes a company has value that is unrecognized, but they may both be very good at what they do. Probably neither person could do the other's job. It's a big reason why I heed Livermore's admonition to neither seek out nor act on tips about the market.

My observation having seen multiple market cycles is that bad news spreads fast and is known quickly, while good news often occurs so diffusely and so quietly that it often doesn't even register as "news". I have as my pinned X post a 54-year chart of the S&P 500 that is annotated with the most prominent bad news for each year. Every one of these events seemed at the time to be a reason for stocks to go down (as did many other things that were only the second or third worst news of the year). I adapted this from a similar chart that Venita Van Caspel published in her 1983 book The Power of Money Dynamics.

May

16

The chair recently made a tweet about a Galton book he was reading. I could read the text on the image but had to squint. I later took a copy of the image as asked Grok to extract for me the text so I can read it comfortably. Grok could only extract the text "Natural Inheritance."

After that, it didn't tell me it failed to extract the rest. it just made up its own fictional text that sounded plausible. I quickly learned it was just slop since I had already read some of the actual text in the picture.

My worry is that some people are using these LLM tools for medical records, creating legal documents. The latest AI gimmick is the so called "Agents" that will supposedly be used to file tax returns, book flights and do actual tasks on behalf of humans. My opinion would be to completely cut out all AI tools for critical tools.

Steve Ellison responds:

I am very, very careful about what I enter at an AI prompt, especially when doing proprietary or confidential work, lest my ideas become part of the cloud.

Laurence Glazier comments:

For this sort of thing use NotebookLM. Choose your sources for it, it will give you citation and preview.

Apr

27

88 years old and skating. He started skating at age 70.

Octogenarian skateboarder shreds concrete in Spain's Bilbao

"My bones are special," he chuckles between sips on a post-workout glass of white wine at his favourite bar in Bilbao's working-class neighbourhood of Begoña. "Though I touch wood."

Steve Ellison writes:

In only 2 more years, he will be old enough to have "sufficient experience … to command success" in Wall Street, as Clews put it, and know exactly when to skateboard down to lower Manhattan in a panic.

Apr

17

Any market parallels?

The Theory Of Societal Stupidity
by Dietrich Bonhoeffer

Dietrich Bonhoeffer (4 February 1906 – 9 April 1945) was a German Lutheran pastor, neo-orthodox theologian and anti-Nazi dissident who was a key founding member of the Confessing Church. His writings on Christianity's role in the secular world have become widely influential; his 1937 book The Cost of Discipleship is described as a modern classic. Apart from his theological writings, Bonhoeffer was known for his staunch resistance to the Nazi dictatorship, including vocal opposition to Nazi euthanasia program and genocidal persecution of Jews.

Stefan Jovanovich asks:

Why do we need a theory?

Steve Ellison adds:

Gustave Le Bon in his 1895 book The Crowd noted that the intellect of any crowd was far lower than that of any of its members. And he considered all political parties to be crowds.

Apr

15

The president seems to believe that trade deficits are evil and must be stamped out. If he ever actually succeeded at meaningfully reducing the trade deficit (so far the reverse is happening), what would be the implications for capital flows into and out of the US, and how might those changes affect markets?

Humbert L. responds:

Finance professor Jeremy Siegal wrote a piece decades ago about how the trade deficit is driven in part to demographics. Currently, the US is consuming more than it can produce, due to baby boomers retiring, no longer working, while still consuming. China is on the other side of the coin, with a younger workforce that is producing more than it's consuming.

Eventually the demographics will reverse, along with the trade deficit. The old folks in the US pass away, along with their consumption, and the US will start producing more than it's consuming, while China's young ones become old, retire, and they start consuming more than they are producing.

Asindu Drileba writes:

This sounds like a very plausible explanation for the phenomenon of "cycles" in the stock market, as described by the senator.

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.)

Mar

30

The hypothesis is that at the end of a quarter in which bonds are up while stocks are down, institutions need to rebalance their asset allocations by selling bonds and buying stocks.

I found 14 such quarters since 2002, not including the current quarter. In the last 5 trading days of those 14 quarters, SPY was up 8 times and down 6 times, with an average net change of 0.9% with a t score of 0.76–statistically insignificant.

My Python code that I used to obtain the above results.

Big Al responds:

That's an event I hadn't thought about in a long time. It's hard to imagine a lot of big institutions running a simple strategy like that these days, which doubt your study would appear to support. But it does make me wonder if there are other, more complex balances or relationships that big players do manage on a calendar basis.

Alex Castaldo comments:

The general idea of trying to take advantage of "fixed behavior" by others is a good one IMO.

Paolo Pezzutti agrees:

It's like finding regularities end of month or Holiday's behavior or several others. I think there may be many still uncovered. Steve on Github has made public a number of Python notebooks. Very nice work to stimulate curiosity in searching patterns. It's not rocket science based on Artificial Intelligence, but I think this methodology has still value.

Asindu Drileba writes:

The rebalancing edge is real. In BTC for example, I realized that the most consistently active, "high activity" period is the time around 0:00 UTC (Server time). Something interesting is always happening during that period.

It turns out alot of people trade BTC daily and it just makes sense to rebalance the position size at midnight. I too even choose it sub-consciously. I don't think many people are choosing 03:00 UTC , 17: 43 UTC etc. Unfortunately, you need second by second, price quotes over many days, weeks, months and years to investigate this activity further. So I put it on pause. But the "activity" still exists.

M. Humbert adds:

Window dressing at quarters end is probably still occurring as well.

William Huggins writes:

several years ago i followed in Markman's steps of investigating the S&P500 drops and additions for irregularities (they did exist but have since been arb'd out). the driving mechanism was that index fund managers were paid to minimize tracking errors, not maximize performance so they would all trade at the same time, causing a secondary effect on the day the change actually took place (there was a preliminary change the day of announcement). it was a pretty basic academic event study but the most valuable part was uncovering "why" big money was doing a thing that created opportunities for fast moving traders (email me if you want it, but the trade doesn't work anymore)

Mar

27

Spec roundup

March 27, 2025 | Leave a Comment


Jeff Watson has been watching the CME:
Anyone else notice the increase in seat prices (trading rights) recently?

Big Al found a history lagniappe:

BabelColour
@StuartHumphryes
Travel back in time 117 years to the Russia of 1908. I have enhanced for you this rare colour photo of the Russian writer Leon Tolstoy, regarded as one of the greatest and most influential authors of all time. It was taken in the grounds of his house at Yasnaya Polyana, near Tula, Russia. It is original colour, not colourised.

Steve Ellison provided his own:

Since one might be well advised to beware the Ides of March, here is a picture I took in 2017 of the ruins of the Theater of Pompey.

Asindu Drileba has been reading:

The importance of contrarianism emphasized by Jeff Bezos, from the Amazon 2020 Letter to Shareholders:

Differentiation is Survival and the Universe Wants You to be Typical

Our bodies, for instance, are usually hotter than our surroundings, and in cold climates they have to work hard to maintain the differential. When we die the work stops, the temperature differential starts to disappear, and we end up the same temperature as our surroundings….While the passage is not intended as a metaphor, it’s nevertheless a fantastic one, and very relevant to Amazon. I would argue that it’s relevant to all companies and all institutions and to each of our individual lives too. In what ways does the world pull at you in an attempt to make you normal? How much work does it take to maintain your distinctiveness? To keep alive the thing or things that make you special?…This phenomenon happens at all scale levels. Democracies are not normal. Tyranny is the historical norm. If we stopped doing all of the continuous hard work that is needed to maintain our distinctiveness in that regard, we would quickly come into equilibrium with tyranny….We all know that distinctiveness – originality – is valuable. We are all taught to “be yourself.” What I’m really asking you to do is to embrace and be realistic about how much energy it takes to maintain that distinctiveness. The world wants you to be typical – in a thousand ways, it pulls at you. Don’t let it happen.

Mar

20

I had a reverse shoe shine boy moment to day. A friend, who shouldn't talk to me about markets, talked to me: "Your boy Trump is crashing the markets. My portfolio …." I take such data points serious - in combinations.

Steve Ellison responds:

Similarly, my sister in October 2008 was getting 150 calls per day from clients asking, "Should I sell?" She worked at an insurance company that also offered investment services. My reaction at the time was, "Isn't anybody calling to ask, 'Should I buy?'"

Jeffrey Hirsch writes:

Still hearing a lot of “Should I buy?” Two weekends ago was asked if would come on cable biz Monday 2/24 to say I was buying mega cap tech. I declined and said I did not think is was time. Posted this that day.

Updates:

Nils Poertner writes:

valid observations here. good to pay attention to odd moves, anything strange (eg like bund move recently) - as there may be more odd things coming!! in other words, be like Alexander Fleming - who stumbled on penicillin by chance - and didn't bin the sample as he wasnt looking for it.

Adam Grimes comments:

I obviously understand the shoe shine boy/taxi driver point here, but it's worth considering that market psychology is not asymmetrical.

P. Humbert responds:

Hi Adam. there is high risk, that I initially heard about the old masters from your writings. I agree, that it probably has more weight for tops. I think, that is where you are pointing to? My friend has quite a good performance in being wrong. He called the the Bitcoin top being bullish and some more. He is a nice guy, just not for markets.

Adam Grimes agrees:

Yeah that's always been my thinking–a little more actionable with exuberance at tops. Bottoms tend to overshoot a bit more, on balance, so I think the shoe shine boy cries uncle a bit too soon.

Nils Poertner adds:

sometimes the crowd is right or they have a hunch but they don't connect the dots yet
eg. "a bit of subprime" in early 2008 - as sort of consensus view among your typical investor back them it was high time to position extra cautious.

Bill Rafter comments:

The “crowd” is mostly right, but the problem is that there are usually several crowds, and of course the composition of the crowds change. If you’re lucky, there will only be two crowds, the knowledgeable ones, and those “asleep at the switch”. The trading rule is simple: follow the informed ones, particularly if the uninformed ones are 180 degrees away. A classic example of this is the Commitment of Traders Report. Ideally the reporting specs will be one way, with the non-reporters the other way (and preferably short). Without the benefit of COT, you can identify best- and worst-informed with regression.

Mar

17

From the first section of:
Fourteen Methods of Operating in the Stock Market
Magazine of Wall Street, 1918

Mar

16

Before last week, the S&P 500 index had 25 declines of 10% or more since 2003. The median of the maximum drawdowns is -14.6%.

Mar

5

If your company is a domestic power generator like Constellation (CEG) or Calpine (CPN), the proposed Trump Administration tariffs at the Canadian and Mexican borders could help elevate gross margins. If Canada cuts off electricity altogether, additional margins may become available. While generators may benefit, US consumers will be harmed.

Uncertainty clouds northern US grids amid Canada tariff threat

Canadian premier says he will cut off electricity exports to US ‘with a smile on my face’

M. Humbert writes:

It’s my understanding that utilities are generally regulated to provide a steady ROA based return. If so, I don’t believe that they can raise their prices and increase their gross margins, as that would raise their ROA. They can raise their prices though if their costs go up (to maintain their ROA). It’s been a while since I last looked at utilities though. Am I mistaken about this?

Carder Dimitroff responds:

Yes, regulated utilities generally provide steady ROAs. However, some states fully regulate their electric utilities. Other states deregulated bulk power (wholesale power) and the generators that supply bulk power. Most population centers in the US are in deregulated states.

In the deregulated states, the title to bulk power passes to regulated distribution utilities at substations adjacent to transmission lines. Specifically, titles pass to distribution utilities at substations' step-down transformers.

Ontario supplies bulk power to unregulated states (Minnesota, Michigan, and New York). Quebec supplies bulk power to New York and New England. New Brunswick also supplies New England. All three provinces own and operate nuclear power plants. While Canadian transmission lines feed power directly to specific locations within those states, imbalances propagate to other states.

Ontario updated its strategy. They now plan to tax Ontario power exports at 25%.

Steve Ellison writes:

In this video Peter Zeihan says that a hurdle to green energy is that essentially all cost is up front, unlike natural gas plants in which only 20% of the lifetime cost is in construction, and 80% is in fuel costs over the life of the plant. So even when total lifetime cost of green energy is less than that from a natural gas plant, the higher upfront costs make financing more difficult. If true, I would guess cost recovery of the upfront expenses is also more risky in a deregulated market.

Feb

11

Steve Ellison wonders:

Will NBER ever acknowledge there was a recession? Or maybe as in 2001, they will retrospectively announce a recession after the recession has already ended. The job market for white collar job seekers was horrendous in 2023 and 2024. But GDP never went negative. "Learn to code" is out; "Learn to weld" is in.

Bill Rafter responds:

Yes, there was Recession. If bureaucrats in power refuse to admit the obvious, or use obtuse metrics to define economic activity, then the Intelligent Man has to find another way to define or measure that activity. The chart below, of Payroll Tax Receipts Growth, matches the negative period you described.

Jan

29

Book Review: Mind Set! by John Naisbitt, from Steve Ellison, April, 2007

Some interesting bits:

- One trend is the continuing growth of China, which Mr. Naisbitt points out is quite decentralized: “Beijing pretends to rule, and the provinces pretend to be ruled”.

- While some fear that American culture is obliterating local cultures, Mr. Naisbitt asserts that the world is changing America more than America is changing the world, as more than 1 million legal immigrants per year enter the United States.

- In an intriguing tidbit, Mr. Naisbitt quotes Alan Greenspan as expecting private currencies to return by the end of the 21st century.

Steve Ellison updates:

That book was written in 2004, before bitcoin was invented (speaking of "private currencies"). Mr. Naisbitt is no longer with us, having passed on at age 92. The last thing I noticed him doing, in 2010 or so, was touting the emerging world as the most important story. In my opinion, A LOT has changed since then. We have macro experts on the List who would have much better insight, but I would start with Rocky's accurate prediction in 2016 that the Brexit vote was the canary in the coal mine for the post-Cold War global elite and their policies of globalization, mass immigration, and "cling[ing] to the religion and arrogance of knowing what is best for the common man — and which often also involves rejecting common sense and facts in evidence."

The decentralization of Chinese government finances is today a key reason why a massive economic stimulus from Beijing, as urged by many Western economists, simply cannot happen. The critical mass of government spending is in the provinces, and their governments are starved for revenue after the real estate bust. Christopher Balding writes frequently about all things China on X as @BaldingsWorld.

Nov

30

When do we start seeing the effects of AI show up in national economic data? If you had invested $5K in a laptop and a word processing program, you could replace a secretary at multiples of the cost. When the web came in, there was Amazon squeezing out the costs of the middlemen.

But I don't see the savings for AI. I see lots of talk, some free programs, but in terms of real productivity, not so much. I'm also told that it's early days and I'm asking for too much in posing such a question, but I think we're now getting far enough into AI that it's not an unreasonable matter to bring up.

One thing that's clear is that AI isn't going to generate employment the way the last tech push did. But if it's going to really change the world as its advocates suggest that it will, those productivity gains should be apparent by now.

M. Humbert writes:

However AI productivity gains are measured, it’ll have to account for the productivity loss due to its high energy consumption. For the Austrian economics fans here. I’ve found Copilot to be a helpful time saving tool, so others probably do as well, so time savings definitely are occurring from AI use today.

Laurence Glazier responds:

Using it all the time, huge experiential benefit. Chatting to GPT every morning while reading Thoreau. Instant context. The other big breakthrough is spatial computing. All in the service of art.

Asindu Drileba comments:

From my experience, co-pilot and other LLMs, have not solved anything that could not already be done via ordinary Googling. Looking up solutions to code issues on stack overflow is no different from LLMs. And stack overflow is still better for some tasks (fringe computer languages like APL for example). LLMs are impressive, but are mostly just gimmicks. The only thing it has actually saved me time on is generating copyrighter material and filler text.

Jeffrey Hirsch adds:

Just had that discussion today about ordinary google still being even better than LLM Ais in finding info. Had some fun with AI editing and embellishing copy.

Asindu Drileba adds:

I suspect that the bad SWE job market is due to high interest rates, no AI. The SWE job market is enriched mostly by VC money. And VC money dried up when LPs withdraw to earn risk free money in treasuries instead of betting on start-ups whose success is on probability. I expect it to recover if interest rates come down to previous levels.

I think the LLM narrative was just something that tech executives parroted to show they had an LLM strategy. It's, Like how in 2018/2017 every executive had a "Blockchain" strategy. A lot of businesses assumed that LLMs would replace simple customer support jobs but they just saw their tickets pile up. Even the $2B valued, Peter Thiel financed, code assistant that would make you money on Up work as you sleep turned out to be a blatant scam.

Steve Ellison writes:

I don't have an answer for Dr. Lilienfeld's question about when AI effects will show up in productivity statistics. But I do hear anecdotally through my professional networks that AI projects are adding real value.

At the same time, Asindu is correct that the bad job market for techies, myself included, is more a consequence of rising interest rates–and I would add overhiring during the pandemic–than positions being replaced by AI. As Phyl Terry put it, "But this company [that announced layoffs] wants to go public so the better story is 'we are smart leaders using AI to become more efficient and profitable' vs 'we were idiots during the pandemic and have to lay off some people because we messed up.'"

Gyve Bones writes:

I find that the AI's ability to interpret my request and put together a coherent synthesis of several sources to be very helpful. Grok is nice because it provides a set of links to sources relevant to the prompt, and to related ??-posts and threads.

Laurence Glazier asks:

I usually have audio conversations with GPT rather than the older typed-in input/output. I just subscribed to X Premium to get access to Grok. Any good links for learning good usage? How nice Musk names it from the Heinlein novel.

Gyve Bones responds:

Check out the sample prompts Grok supplies on the [ / ] section in ??. The news analysis prompts for trending items is pretty cool.

Bill Rafter writes:

My business partner and I are in the process of marketing a new software application. Although we are rather literate, we have been running all of our marketing materials through Copilot, and we are amazed at the improvements Copilot makes to our text. It results not only in improved communication, but is a real time-saver. We even asked it to write a business plan, and it came back with a better one than our original.

Peter Penha offers:

I have not (yet) been on Grok but have found that the prompts do not differ very much across LLMs:

A Primer on Prompting Techniques, June 2024.

Prompt engineering is an increasingly important skill set needed to converse effectively with large language models (LLMs), such as ChatGPT. Prompts are instructions given to an LLM to enforce rules, automate processes, and ensure specific qualities (and quantities) of generated output. Prompts are also a form of programming that can customize the outputs and interactions with an LLM. This paper describes a catalog of prompt engineering techniques presented in pattern form that have been applied to solve common problems when conversing with LLMs. Prompt patterns are a knowledge transfer method analogous to software patterns since they provide reusable solutions to common problems faced in a particular context, i.e., output generation and interaction when working with LLMs. This paper provides the following contributions to research on prompt engineering that apply LLMs to automate software development tasks. First, it provides a framework for documenting patterns for structuring prompts to solve a range of problems so that they can be adapted to different domains. Second, it presents a catalog of patterns that have been applied successfully to improve the outputs of LLM conversations. Third, it explains how prompts can be built from multiple patterns and illustrates prompt patterns that benefit from combination with other prompt patterns.

This is earlier/shorter February 2023 paper - I am also a fan/follower of Prof. Jules White’s classes on Coursera why I flag the shorter/earlier paper as well.

Separate on the subject of AI - Eric Schmidt has a new book Genesis with Dr. Kissinger as a co-author (his last work before his passing) but Schmidt did a Prof G Pod Conversation released Nov 21st - in the podcast Schmidt goes over the threat from LLMs that are unleashed and noted that China in his view has open sourced an LLM equal to Llama 3 and that China instead of a being three years behind the USA on LLMs is a year behind. That China comment can be found here at 26:30.

Finally if anyone wants a great book I have read, on the history of the race to AGI going back to 2009: the Parmy Olsen book Supremacy on the histories of Sam Altman and Demis Hassabis is a wonderful read. Also breaks the world down between the AI accelerationists and the AI armaggedonists.

Big Al adds:

I do use Bard to learn or refresh my memory with R. For example, I am trying to use the "tidyverse" set of packages, and Bard is very useful when asked to write code for some task specifically using, say, tidyquant. The code almost never works first time cut & paste, but I can see how things are done differently and figure out what needs fixing. And I get answers to simpler problems faster than on Stack Exchange which is better for more complicated issues.

Laurence Glazier comments:

It's an inverted Turing test situation. The things that AI can't do help identify our humanity, our birthright.

Nov

24

Contrary to what has often been repeated on this esteemed list over the years, the art and process of trading is fundamentally the art and process of setting the right stops. Simpletons may claim that adding stops to a system (trading ES) reduces profitability, but that's only because the system itself is flawed, with laziness baked into its design. Setting the right stop is an integral process—it involves gauging current and expected volatility, weighing potential paths, and accounting for the bias.

Steve Ellison writes:

One of my best experiences with this list was that at the sparsely attended Spec Party in summer 2009, the 20 or so of us who were there had a very spirited discussion in Victor's living room about whether it was advisable to use stops or not. Many excellent points were made both pro and con.

Speaking for myself, I usually don't enter stop orders because they become part of the market, but I have mental stops. On the rare occasions when I actually have a profit, I am determined to not let it turn into a loss. And if a trade goes against me (by a nontrivial amount), that's new information that apparently my original analysis missed; in that case I am determined not to let a small loss turn into a big loss.

To put it another way, I entered a trade because I thought I had an edge, but the market moved in the wrong direction. Maybe something bigger is going on than, say, my analysis of the last 10 post-options-expiration weeks.

Big Al offers:

Stop Orders in Select Futures Markets
Nicholas Fett and Lihong McPhail
Office of the Chief Economist
Commodity Futures Trading Commission
August 29, 2017

This paper analyzes trade and order book audit trail data to provide a detailed summary of the use of stop orders in select futures markets; specifically E-mini S&P 500 Futures, Ten Year Treasury Note Futures, and WTI Crude Oil Futures. Recent flash rallies and the ever increasing speed of futures markets have called into question the appropriateness of traditional stop order strategies. By utilizing metrics related to both placement of and execution of stop orders, we show that stop orders are being used in these futures contracts with varying frequency and the strategy of stop order placement varies greatly by participant. As expected, trades involving stop orders are found to be highly correlated with intraday price volatility. Existence of stop orders is generally unknown to market participants as stop orders are not visible in the orderbook but must be triggered by a trade in the market at the corresponding price. More importantly, our analysis indicates that many traders are not only using stop orders for hedging purposes but also using them for latency reduction strategies. We provide a background on the usage and depth associated with stop orders in selected futures markets.

Larry Williams responds:

THANKS FOR THE POST. This should dispel the notion "they are going after my stops."

Asindu Drileba writes:

I don't actually use stops at all. My position size is my stop. I only bet a maximum of 3% of my bankroll. I really only get out of the market when I am liquidated. I sleep knowing that if I am to loose, my maximum loss is capped at 3%. I don't even respond to margin call emails. I often want to capture the moves between the daily open and the close. So what happens in between is something I usually ignore.

Oct

16

75-minute interview with Professor Bejan on the occasion of his winning the 2024 Association of Mechanical Engineers Medal: The professor discusses, among other things, how his experience playing basketball gave him insights into how systems of flow evolve.

Prof. Bejan's Duke site

J.A. Jones Distinguished Professor of Mechanical Engineering

Professor Bejan was awarded the Benjamin Franklin Medal 2018 and the Humboldt Research Award 2019. His research covers engineering science and applied physics: thermodynamics, heat transfer, convection, design, and evolution in nature.

He is ranked among the top 0.01% of the most cited and impactful world scientists (and top 10 in Engineering world wide) in the 2019 citations impact database created by Stanford University’s John Ioannidis, in PLoS Biology. He is the author of 30 books and 700 peer-referred articles. His h-index is 111 with 92,000 citations on Google Scholar. He received 18 honorary doctorates from universities in 11 countries.

Oct

12

Recommendations for an intro to multivariate statistics?

Bill Egan replies:

Here are four excellent multivariate statistics books I have used for many years. I suggest tackling them in this order.
1. Jerrold Zar - Biostatistical Analysis, 5th ed. (this is half univariate and half multivariate)
2. Neter, Kutner, Wasserman, Nachtsheim - Applied Linear Statistical Models, 4th ed (there is now a 5th ed and you can find the pdf by googling)
3. Alvin Rencher - Methods of Multivariate Analysis (there is now a 3rd ed.)
4. Mardia, Kent, Bibby - Multivariate Analysis (there is now a 2nd ed.)

You need to understand linear algebra to do this, e.g., at the level of Strang's Introduction to Linear Algebra, 6th ed. (his lectures are on MIT's opencourse website). Rencher, Neter, and Mardia all use that notation extensively. You also need to understand and be able to do univariate stats at the level of:
• Snedecor and Cochran - Statistical Methods, 8th ed.
• Riffenburgh and Gillen - Statistics in Medicine, 4th ed.

You will really learn multivariate methods only if you code them. Matlab is the best (Matlab Home is cheap), and yes, I coded everything in these books and a lot more work of my own invention in Matlab.

David Lillienfeld adds:

Snedecor and Cochran is the grand old lady of texts. Neter et al is still pretty popular on campuses.

Asindu Drileba asks:

Concerning statistical packages. I often hear some data science communities complain about how there are simply too many bugs & wrong implementations in the Python space. Maybe this is why you are recommending MATLAB? What do think of R or Julia?

Bill Egan responds:

I have used Matlab since 1993 for many things - research, papers, patents, commercial scientific software products. Matlab stands for matrix laboratory. The original data structure was scalar, vector, matrix. If you like to work in matrix/linear algebra notation, or need to, Matlab is the program to use. Other data structures have been added on, such as tables for mixed data types, but like al ladd-ons, this does not always work well. Quality control of the software is great. Very widely used by engineers. Very high level language, so you can see the algorithm without getting lost in the details like you do in C++.

R is not so good for linear algebra because the original data structure is a table for mixed data types. Matrix work is more difficult. Quality control of core R and major packages is good despite R being open source (although it has license restrictions) because it is used by many academic statisticians. I used R for analysis for a couple of years. Fairly high level language. Better for classical stats work where you make a table out of the data and have mixed data types.

Python is completely open source and the people who created and use it most have no knowledge of statistics and that shows. We used it primarily as a scripting/control language inside one of my software products. Available packages do have bugs/errors or are missing methods for stats. We tested them and could not use them; I had my guys code any stats related stuff from scratch. It is not as high level a language as R or Matlab, so you have to do more work. Do not recommend it.

I have no experience with Julia.

Sep

28

Lana Del Rey — My boyfriends really cool, but he is not as cool as me. Cause I'm a Brooklyn Baby. An interview recently posted here with The Chair — "I attribute your being humble to being from Brooklyn" (interviewer referring to The Chair). Another person I listen to - Such mistakes can only be made by people who have not spent a lot of time in Brooklyn. Brooklyn comes up so many times. What's is there to know about it? Of course I have heard of people talking about other cities.

But people that talk about Brooklyn always say it like there is something they know which others don't know. What is in Brooklyn? What does it do to people?

David Lillienfeld adds:

In the epidemiology world, when one of the organizations meets in Manhattan, inevitably someone will suggest to the younger members to go across the Brooklyn Bridge and experience Brooklyn. There is definitely something about Brooklyn that focuses one's thoughts.

Steve Ellison offers:

The Chair wrote a whole chapter on this topic, the first chapter of Education of a Speculator, titled Brighton Beach Training.

Laurel Kenner suggests:

Survivors go there when they get to America.

Alex Castaldo responds:

Agreed, immigrants from Central and Eastern Europe often arrived in Brooklyn as a first step towards success and acceptance in America.

H. Humbert writes:

There is a hierarchy among the real estate developers of New York. Those who develop real estate (especially large commercial buildings) in the central area (the island of Manhattan, also known as New York County) consider themselves socially above the multimillionaires who develop property in the boroughs of Brooklyn, Queens, Bronx and Staten Island. They refer to Manhattan as simply "the City" and seldom go to the other boroughs (other than to take an airplane at LGA or JFK airports, which are in Queens).

Donald Trump's father was a developer of large number of properties all of which were in Queens and Brooklyn and he considered Manhattan development too financially risky. He was quite wealthy but in view of the above was not considered a "major New York developer", like Roth, Reichmann and other well known names.

His son Donald was very ambitious and wanted to move up in society. Contrary to his father's policy he took a gamble and decided to put up a large building, the Grand Hyatt Hotel on 42d street in Manhattan. The project was completed in 1978 and Donald Trump joined the ranks of major NY real estate developers. (What the other developers thought of his operation is another subject and requires a separate article). Even if he wasn't fully accepted by all, when his daughter married a member of the Kushner family, another prominent Manhattan developer, a few years later, it confirmed that the Trump family had reached the first rank among New York's wealthy families. But Donald Trump, having overcome his Queens handicap and shown that he could do better than his father, was not quite satisfied and he decided to enter national politics.

In summary, there is a slight prejudice against people from Queens and Brooklyn, which sometimes causes people to be even more motivated to succeed and be accepted.

In addition Brooklyn has its own distinct accent, which causes the prejudice to be slightly greater. If you would like to know what a Brooklyn accent sounds like you can listen to any speech by Janet Yellen. When she was in line for a top job in Washington, a previous Treasury secretary (probably hoping to get the job himself) mentioned her accent as a reason she should not be appointed. She got the job anyway. Another success for Brooklyn.

Jeff Watson gets musical:

Steely Dan nailed it.

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

4

Bud Conrad is not sanguine:

We avoided an official recession despite negative 2% to 3% tax growth. The Treasury and the deficits were pumping money into the economy in 2023. It now looks like no problem in Tax receipts, but I just don't believe that things are clear sailing. Wars, Debts, Foreigners cashing in Treasuries from their trade surpluses (our Trade deficit), Stock market toppy concentration in the Tech winners. Incompetent politicians. I think things are worse than I think they are.

Steve Ellison keeps the wall of worry updated:

Updated! Now 53 years of convincing reasons why the stock market should go down, superimposed over the 48x increase in the S&P 500 during the same time period (logarithmic scale). 2023: Nearly everybody expected a recession. That reason is added, along with the S&P's 24% increase.

May

30

Coney Island Was Once Full of Dueling, Backstabbing Theme Parks
Come one, come all to the controversial, ugly beginnings of what was once called ‘Sodom by the Sea.’

Coney Island was once a glittering star of the early 1900s. It was the Progressive Era, amusement parks were becoming enormously popular across America, and New York City’s version of roller coasters and carnival games seemed like the epitome of wholesome fun. But the beachy entertainment land was quite different than it is today. Coney Island mainly consisted of three theme parks: Steeplechase Park, Luna Park, and Dreamland. And from 1904 to 1911, all were locked into a perpetual dance of stealing acts, copying rides from each other, and some dirty competition.

Steve Ellison recalls:

We had a big Spec Party event at Coney Island in 2007 when Aubrey was still a toddler.

May

19

Apropos worry wall:
- Unprecedented US debt
- Presidential candidates to debate from jail cell vs hospital room
- Democracy in decline

Humbert H. writes:

Sooner or later, everyone is right.

Larry Williams responds:

Bob Prechter would like to hear that!

Steve Ellison adds:

My pinned tweet documents 53 bricks in a 53-year wall of worry. But Venita Van Caspel made the original chart in her 1983 book The Power of Money Dynamics. I just added 40 years of additional worries.

May

12

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

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

Humbert H. writes:

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

Jeff Watson expands:

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

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

Steve Ellison adds:

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

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

June 5225
September 5282

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

Apr

14

It has been claimed that the stock market was bearish during the interval from the full moon to the new moon. I wrote a Python script that tested this theory and found it wanting.

The Python script is on my GitHub page. You will also need the csv files "new_moon_date_components.csv" and "full_moon_date_components.csv" (in the same GitHub directory) if you want to follow along at home.

The Github page shows the steps, but there is additional explanation on this X thread (hit "Show replies" to see all steps.)

Mar

30

From The Mind of Bill JamesThe Mind of Bill James by Scott Gray, which I've been reading:

All things in baseball tend to return to their previous form. A team whose record improves one year will tend to decline the following year, and vice versa. In 1980, for example, only five of the twenty-six teams moved in the same direction in which they moved in 1979. It also applies to individual players. Bill found a way to express not merely the statistical principle of regression to the mean, but also what he called the 70/50 rule. Seventy percent of teams that decline in one year will improve the next; 70 percent of teams that improve will decline; and in all cases the amount of rise or fall is about 50 percent, so that a team twenty games over .500 one year would be ten games over .500 the next. (The percentages are much different for very big or very small improvements and declines.) “These were not things that I had expected to find,” Bill wrote. “Weaned on the notion of ‘momentum’ since childhood, I had expected a team which won eighty-three games one year and eighty-seven the next to continue to improve, to move on to ninety; instead, they consistently relapsed. Half-expecting to find that the rich grow richer and the poor grow poorer, I found instead that the rich and the poor converged on a common target at an alarming rate of speed.

It also applies to individual players. Bill found a way to express not merely the statistical principle of regression to the mean, but also what he called the 70/50 rule. Seventy percent of teams that decline in one year will improve the next; 70 percent of teams that improve will decline; and in all cases the amount of rise or fall is about 50.

Steve Ellison writes:

From my experience, I think the S&P 500 is less mean reverting in 1- to 2-week timeframes now than it was in the mid-2010s. On the other hand, the presidential election cycle pattern has been spot on since the beginning of bearish midterm election year 2022.

Eric Lindell comments:

These data pertain to relative performance — eg, a team's record relative to other teams. For absolute gauges — like how much I weigh on a diet, there's no such reversion to mean.

Kim Zussman responds:

Funny stuff! For asset managers everything is relative. For their customers (without yachts), it is absolutely absolute.

Where Are the Customers' Yachts?: or A Good Hard Look at Wall Street

Humbert H. agrees:

And that’s why people should not entrust their assets to asset managers, unless these people suffer from some sort of emotional instability and can’t handle losses without some stranger pretending to care.

Mar

10

1999-2001 is an interesting period to study as there are many parallels to the present. Back then, the approach of the year 2000 caused a rush to buy new technology to fix all the old systems that used two digits to represent the year. The efforts were generally successful, and doomsday predictions failed to materialize, but the event pulled a lot of demand for technology from the future into the present. When that future arrived in 2001 and 2002, technology sales slumped because everybody already had shiny new systems–no need to buy more. A similar scenario occurred with the rush to enable remote work and communications in 2020, a bonanza for technology companies. What is different this time is that the technology bust resulting from the saturated market already occurred in 2022-23, but now there is a second wave.

K. K. Law notes:

Don't know if anybody ever mentioned about in the 2000 era many optical components manufacturers double-booked and triple-booked the actual TAM. I knew that first hand but too late. Then the CEO of a major component manufacturer called JDSU, now has become a much bigger company, due to multiple M&As, decided to resign in order to sell his company stocks.

Steve Ellison responds:

I vividly remember that JDSU reported blockbuster earnings in October 2000 that for a day or so reversed the Nasdaq rout that by then had been in progress for 7 months. Jim Cramer, who was still running his hedge fund and presumably still had an edge from calling his buddies at bulge bracket firms to find out what big orders they were working that day, pointed out that JDSU's sales were probably just piling up in inventory at downstream suppliers (that had all reported disappointing results); hence JDSU sales were about to go off a cliff. Since I still have the scars from owning JDSU, I developed a tracker of some important companies in Nvidia's ecosystem (chart below). If one of the other stocks turns down, maybe it will be an early warning.

K. K. Law comments:

The actual bookings of all the optical suppliers were over-inflated by many folds over the actual demands by the telecom system manufacturers and service providers . The market eventually realized that.

Steve Ellison adds:

Even in the absence of fraud, when there is a component shortage, buyers inflate their orders to try to gain priority, and executives at the supplier might misinterpret the orders as real demand. When the bottleneck is alleviated, and supply begins to actually flow, the buyers quickly cancel the excess orders in a phenomenon known as the "dreaded diamond", as I discussed in a Spec List thread in 2021.

Mar

2

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

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

Peter Ringel asks:

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

Zubin Al Genubi responds:

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

Peter Ringel continues:

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

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

Zubin Al Genubi sums it up:

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

Jeffrey Hirsch writes:

Today’s post RE ATH:

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

Steve Ellison comments:

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

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

Feb

7

It is not hard to see this is very late stages of speculative madness but I really would like to know how the risk management teams approve buying Nvidia stock here after adding $200 billion to market cap in 3 days?

Larry Williams offers:

Maybe my cycle forecast for NVDA would help:

Asindu Drileba writes:

I don't know why people are still buying Nvidia. But this is what I personally think of the stock. Nvidia has an 80% market share in the Graphics Card business. Their bread and butter used to be video gaming, 3d animation, video editing, later crypto mining, AI (computer vision), AI (Large Language Models), AI (Image generation) possible new advances may occur in Molecular Dynamics, Self driving cars etc. The CEO had an interesting interview where he talked about possible areas Nvidia may venture into.

But here is one strange thing about high performance computing (Nvidia's Niche): We would think that the better (higher performing) their products are, the less people would buy because people would do more with less right? It's actually the opposite.

— In gaming for example, when graphics cards improved people moved to less polygon looking characters and wanted more details like finer hair & plants. From there they even went to more computationally intensive algorithms like ray tracing that mimic real world scattering of light. Requiring even more compute in subsequent algorithmic advances.

— In Bitcoin, many people using Nvidia GPUs made it more difficult to earn money from crypto mining. Which requires people to have even more Nvidia GPUs just to continue earning the same income.

— In AI, when ever a new breakthrough was made, researchers often trained models with larger datasets, using more & more GPUs. Chat GPT for example was trained on 1 Trillion corpus of text.

So if they do maintain this 80% market share and these underlying industries continue to grow (and make new break throughs). It makes sense that Nvidia will be very valuable in the near or distant future. Buying now (at all time highs) is definitely dangerous but, even if the bubble pops, the underlying industries it facilitates will still be present. And if more breakthroughs in these industries are made, it makes sense that Nvidia still has some value left in it.

Cagdas Tuna responds:

Good fundamental points and there I have 2 counter outlook:

-Gaming industry; I almost everyday play an online game called Destiny 2, and their developer Bungie has reduced workforce around 10%. I know many other gaming companies are reducing/reduced workforce which doesn't give too much optimism in that area.

-Bitcoin mining; there is halving in a few weeks and this will require more powerful computers but it will also increase the cost which in the end will end up new miners losing money in most cases. Only way to maintain gains in mining is Bitcoin price to double or triple in a year.

Even on the best possible scenario it will not add 200 billion dollars worth growth in many many years.

Steve Ellison comments:

Words of wisdom from Rocky's Ghost, posted in the Spec List on April 4, 2017. And yes, I am long NVDA. I believe this is the study Rocky referred to.

Soros and I share very little. However, I have come to agree with him that the right position is to be long "bubble" (however defined). I used to subscribe to Anatoly's view and to be bearish during bubbled but I discovered that from a risk-adjusted-return perspective, it's better to be right "today" than right "tomorrow." Along this point, I read a study that shows a substantial percentage of stock returns occur during the last surge in a "bull market". If you miss this surge, it's very difficult to keep up with the indices in the short term. And in the long term, we're all dead.

Asindu Drileba replies:

Gaming Revenue was about $142B just in 2022. If cloud gaming, something Nvidia is planning todo is successful, I expect this to jump by several multipliers. I expect Cloud gaming to be a bigger business than say AWS. Gaming is really big, I believe you have heard about gaming being bigger than movies & music combined.

The Crypto market cap is $1.6T, a lot of these Crypto currencies use graphics cards to mine their currencies. So I don't think $200B is too much. For Nvidia which is well positioned in these industries, i.e., owning 80% of that market.

Humbert H. adds:

One fundamental point about predicting the future of NVIDIA. It's a complete accident (lucky for NVIDIA) that the hardware optimized matrix multiplication used for 3D graphics pipelines was also useful for AI.

K. K. Law riffs on The Great One:

Confirmation bias. And this is where the AI computation puck is at of course.

Cagdas Tuna realizes:

Now I see why everyone chasing this momentum with FOMO as all assumptions based on Nvidia will get all of the cake in the market!

Jan

11

Looking at 5-day forward returns after one-day net changes of 5% or more, the expectation for NVDA stock is negative based on the period back to 2015, but if I shrink the study period to only the past 2 years, results are consistent with randomness with a t score of -0.60.

Output of my Python code:
The sample mean log return is 0.0019077453098868752
The population mean log return is 0.005224266059430747
Backtest sample statistics (log returns):
Mean: 0.0019077453098868752
Standard deviation: 0.03251087812071903
N: 35
t: -0.6035149614769291

I put my code on Github.

Last 10 results:

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.

Nov

1

[28 Oct] is buy and hold investing dead? after 64 days since the last 20 day max on 7-31-2023 and three twenty day minima in a row, time to throw in towel. but in situations like this, its 97% bullish for 13 days later with a 130 big S&P expectation, so don't. and presidential odds increasing - also bullish.

yes i've lately been wrong. should i give up ship about 5 occasions a year like this - all with expectation of 13 days to next 20-day max and big positive expectation? one recall 1998 when Dow stood at 800 and one started buy and hold.

Steve Ellison responds:

There have been many bear markets (which can only be identified retrospectively) that lasted a year or more, with one as recently as 2009. I usually interpret buy and hold to pertain to a period much longer than 3 months.

[1 Nov] well that's 118 pts of the 130-pt expectation i noted. but it took 3 days not 17.

Vic's twitter feed

Oct

18

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

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

Nils Poertner comments:

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

Zubin Al Genubi adds:

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

Steve Ellison writes:

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

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

H. Humbert writes:

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

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

Oct

9

For the military guys here- does remote viewing work? friend of mine - a statistician - who was tangentially involved decades ago- said what is striking: "those who didn't believe in it - scored worse than chance". Can imagine that.

I go with the notion it may work in rare cases - but when it comes to forecasting mkts - one may run into many new challenges. probably takes time and would require years of training. not exact science anyway. could help with overall intuition perhaps.

Alex Castaldo is skeptical:

"those who didn't believe in it - scored worse than chance".

Trying to salvage something from a negative experimental result. Reminds me of "Well, our anticancer drug failed in a large sample test, but it seemed to work for left handed women between 65 and 75 years of age. That's very promising". Shifting the analysis to a question other than what was asked.

Nils Poertner responds:

for trading (or life in general) - it is good to be skeptical- and don't believe anything that comes along. on the other hand, one wants to keep the option of some (pleasant) surprises that one does not know everything. Controlled RV was used by the Military to my knowledge. that itself is a hint it may work.

Eric Lindell asks:

were these controlled experiments where either the viewer or viewed were in a faraday cage? Personally, I think there are two possible outcomes statistically: chance and not chance.

I'd like to see a rigorous study of remote viewing by those who don't believe in it — with faraday and standard scientific controls. I'd be surprised if it held up. You would need an objective measure of similarity of appearance between viewed and vision — which itself would be hard to gauge — statistically or even anecdotally. The faraday control especially is key to identifying the question itself — let alone its answer.

Humbert H. writes:

I've seen at least two Sci-Fi type movies where the remote viewer is tortured by all the evil he can see to the point of not being able to live on. I would say there are enough people in this world who wouldn't be troubled by seeing evil if they can become really rich, so I would say there is no real evidence of statistically significant remote viewing.

Steve Ellison comments:

There is a huge problem in academia, where the paradigm is "publish or perish", of research that can't be replicated. A 1940 study by Rhine and Pratt that found evidence of extrasensory perception was the original poster child for this problem. A big part of the problem is the traditional significance cutoff of p = 0.05. That's a reasonable starting point, but when thousands of researchers are working at any moment, 5% of their studies will reject the null hypothesis purely by chance. It adds up to a lot of non-replicability.

I have often thought that an advantage for those of us who are scholars of the market is that we don't have any pressure to publish and hence don't need to force dubious findings into practice. Instead of a pat on the back for being published, we get a cruel but not unusual form of "capital punishment" if our backtests can't be replicated in the market.

Anders Hallen actually finds research for critique:

Stock Market Prediction Using Associative Remote Viewing by Inexperienced Remote Viewers

Sep

16

have not idea really about health of US regional banks and to what extent some use creative accounting to say it that way.

What makes me wonder is only that European banks (and Japanese) are quite good with their gimmicks and I have seen this pattern before. Many US analysts slacking off foreign banks and they are prob right here. and then we had those 2 US banks earlier this year …oh, no they were only a special case (allegedly). and what happens if the econ surprises to the downside? remember we live in times when people are low re irony, and highly suggestible and lack imagination.

Henry Gifford comments:

I think those two banks were a special case because they made loans on rent-regulated New York City apartment buildings, and held those loans in their portfolios.

New rent regulations passed in 2019 severely limit rent increases, require most increases to be rolled back after thirty years, eliminate all paths to deregulate an apartment, etc., thus the buildings are worth less than owed on them, and as the five-year loans come up for renewal they go into foreclosure. Few banks were stupid enough to make loans on those buildings. I think definitely a special case.

Humbert H. is skeptical:

Seems like a stretch to attribute SVB to just those loans give the well-documented run on the bank and the treasuries they were forced to sell and recognize their market value vs. book, the possibility of the latter being the commonly attributed trigger for the run, along with the slower liquidity crunch at the client startups causing high withdrawals.

Henry Gifford elaborates:

Word in New York real estate circles is that the run on the bank was caused by depositors hearing about the bad loans and rushing to get their money out. Selling treasuries and etc. were all after the run. Here in NYC, nobody is surprised to hear about craziness when it comes to regulations and the effects later. The stories here don’t mention liquidity crunches at startups. Maybe the banks made two types of risky loans?

The printed articles stuck to good journalistic standards by avoiding saying just what % of loans in the portfolio were on rent-regulated buildings. It might have been a minor %, but still caused a panic, or it might have been a large % - presumably rent-regulated buildings paid higher interest than other buildings, thus an incentive to make more loans.

If a bank already has enough loans to force them under if the political pendulum in NY swung hard in favor of tenants, there would be no reason to not make more of them, thus they might have had a large % of them. But, nobody seems to be saying. I think the only real word would come from the depositors – maybe the ones who got their money out first.

Humbert H. replies:

There were pictures of lines both in Silicon Valley and NYC. Peter Thiel's recommendation to the portfolio companies of his fund supposedly played a role. It's hard to do a thorough analysis on the anatomy of a run, too chaotic and not well documented in terms of why anyone did anything in particular. To this day there's contradictory information on the collapse of the tulip craze.

Steve Ellison writes:

Jim Bianco has been saying that the banking issues this cycle are more likely to occur in slow motion, as depositors individually decide to take low-yielding money out of banks in favor of T-bills and other higher yield instruments. As deposits shrink, banks are cutting back on credit, and there was an upsurge in bankruptcies in August.

Humbert H. responds:

This is true, but there is a contrary trend of low-yielding treasuries maturing as well as getting sold, and new money invested in higher-yielding treasuries thus making the balance sheets less of a work of fiction and improving that side of the cash flow equation.

Humbert X. adds:

Bank loan to deposit ratio is actually at very low levels, historically speaking. The problem is demand.

Humbert H. disagrees:

Can't be just demand. There are zillions of articles out there about banks significantly tightening their lending standards. Some of these came out almost a year ago, but right after the spring banking crisis, around 50% were reporting that they had tightened their standards and through the summer the trend continued and/or was reported expected to continue.

Humbert X. processes:

Excellent. You just identified consensus. Now, do you want to bet against it, based on fact based observations of data? Or go with the crowd. Always the ultimate question in investing.

Stefan Jovanovich offers:

We now have the same financial system that Ulysses Grant forced Congress to accept by unconditional surrender during his two terms as President. The savings of bank depositors were going to be guaranteed by the promises to pay of the U.S. Treasury.
The SVB collapse established a basic rule that all deposits by people and their entities are utterly safe. There can be no bank runs by depositors because the FDIC and the other financial satraps created by Congress are not allowed to default. If you want a comparison from more recent political history, the old people chasing Dan Rostenkowski in the parking lot is an appropriate one. The rest of the government's promises might be at risk; but Social Security was never going to default.

Humbert X. replies:

Except that two banks just blew up because of bank runs.

Humbert H. analyzes:

I don’t find bank stocks very interesting at this point regardless of the exact nature of what ails them. Banks aren’t very transparent to begin with. I’ve owned three for a long time, I’ll stick with those, but won’t explore any new ones. Those that are expert bank balance sheet readers can separate the wheat from the chaff, but overall this is mostly a macro bet.

Stefan Jovanovich replies:

"Bank runs by depositors" vs. bank runs by shareholders and bondholders.

Humbert H. asks:

What does that second category even mean? A bank run deprives the bank of cash and can in some instances cause a quick collapse via various mechanisms (like not having the cash to operate or having to redeem underwater securities). Shareholders and bondholders selling their property is in a totally different category, while certainly not welcome by the management or the remaining s/b-holders. You can call it a "run", but it's just a common market reaction to bad news or rumors.

Stefan Jovanovich expands:

United States banks could expand their cash issuances to the full extent of the face value of their holdings of Treasury bonds. That meant that it was impossible in practice for a U. S. bank to be "deprived of cash" as GR puts it. U. S. banks were required to have their required statutory capital invested in Treasuries; in an era where bank's total liabilities rarely exceeded 3 times that capital, banks could draw on the Comptroller of the Currency for notes equal 30%-40% of their total deposits. The result was that there was not a single failure of a United States bank between 1865 and their disappearance in the years after the passage of the Federal Reserve Act. (There were bank failures but those were limited to the state chartered banks, which were not restricted from investing in real estate and were not regulated under such an inflexible standard by the Comptroller of the Currency.) It was this very inflexibility that the Federal Reserve Act was supposed to solve.
The current guarantees of deposits under the FDIC produce the same net result; no one will have to worry about getting "cash" from a bank for their deposits. Shareholders and bondholders, on the other hand, now have to wonder what a bank franchise is worth if the depositors will have to be reassured by the promises of yields comparable to those offered by the Treasury market and the Federal guarantors are looking at a future where politics demands that they make good on all accounts of the banks small enough to fail.

Humbert H. expands:

SVB failed precisely because customers who had more cash on deposit than the FDIC limit started withdrawing that cash, which led to a chain reaction when other customers started worrying even more about THEIR ability to withdraw cash once the first batch initiated the run, which in the age of modern communications became public within hours or even minutes. They called the bank and formed lines outside the branches, but SVB simply didn't have enough cash to give them and actually stopped giving it them. To the contrary of what you're saying, they could not simply issue cash. Many of their customers faced bankruptcy, and I personally knew a couple of them. The bank, in fact, was forced to mark their treasuries to market, was thus insolvent, and would have to declare bankruptcy had the FDIC not stepped in. The VAST MAJORITY of deposits was above the FDIC limit, so "no one" having to worry is pure fiction.

Stefan Jovanovich responds:

You are describing what the rules were before SVB's failure, not what they are now. The FDIC was forced by circumstance to effectively remove all limits to its deposit guarantees. Are you saying that there were depositors of SVB who have not been 100% made good?

Humbert H. explains:

No, I'm not saying that, the last part. The FDIC did not explicitly change the rules, so people have to worry even now. You can interpret their actions as an iron-clad guarantee, but that's just that, an interpretation. They, with rare exceptions, had not let depositors lose money even before SVB, and yet people were still worried. There were billions withdrawn from regional banks after SVB precisely because people were worried about the same thing happening there, and a lot of that money went into the systemically important banks and other safer places/instruments. Now it all kind of died down, arguably because no similar runs requiring FDIC intervention happened.

Stefan Jovanovich is appreciative:

Thx, HH. I am basing my assumption about the de facto extension of the FDIC guarantee to all deposits on the Pew Research data.

As banking industry observers wonder whether more dominoes will fall, about a third of Americans (36%) say they’re very concerned about the stability of banks and financial institutions – considerably smaller than the shares expressing that level of concern about consumer prices and housing costs – according to a recent Pew Research Center survey.

Sep

8

More an open question - don't have the answer…To what extent are economic figures released from gov and gov related entities are really representative of the whole eco situation in the US and Canada? Eg have a number of friends in the US who have lost their jobs in recent months in various industries - and find it hard to get back in. Of course these are all anecdotes only.

The thing I noticed about so many analysts now (also traders) is that they take everything for granted- but our world is based (at least to some extent) on smoke and mirrors.

Larry Williams responds:

For years I have heard this argument: the Gummint guys cook the books, yet their data has, indeed, reflected reality. As I see it, the Shadow Stat crowd just seeks something to prove they are right about being wrong.

Humbert H. comments:

This weekend some figures came out with a huge drop in employment of the native-born Americans and a large increase in the employment of the foreign-born. Supposedly, Bureau of Labor statistics show that 1.2 million native-born workers lost their jobs last month while the number of foreign-born workers increased by 668,000 in August. So depending on who your friends are, you can get a vastly different impression of the overall employment situation.

Steve Ellison comments:

The labor market is very much a mixed bag. The Wall Street Journal had a feature article in May about the "white-collar recession", while it appears that job openings for blue-collar and service workers are going begging.

The big tech company layoffs this year included significant numbers of H-1B visa holders. An H-1B visa holder who is laid off must find a new job within 60 days or leave the US. I read a month or so ago that 90% of the laid-off H-1B visa holders had found re-employment. That situation might be exacerbating the white-collar recession for native-born workers as even in good economic times, many companies use H-1Bs as a way to pay below-market salaries. It is easy to imagine that in a tech market glutted with job seekers, most companies choose the cut-rate H-1B holders.

I looked in the latest BLS report:

Comparing apples to apples (in thousands):
first number July - second number August
Foreign-born employed: 29728 - 30396
Foreign-born unemployed: 1142 - 1171
Native employed: 132254 - 131031
Native unemployed: 5230 - 5452

Big Al writes:

When I think of economic data, I think about how the releases affect markets. As has been posted on the list before, the question is: If you knew the number beforehand, could you trade it? How will the market react? And in today's market, there may be many black boxes programmed to trade each release in particular ways, and then adapting to the reactions to previous releases. And then one must wonder whether some players get the number faster than others.

I asked ChatGPT for examples of data breaches, and it provided these:

US Federal Reserve Lockup Breach (2020): In March 2020, it was reported that a former Federal Reserve employee and his contacts had allegedly leaked confidential economic information to a financial analyst, who then provided it to traders. This case raised concerns about the security of the Federal Reserve's data release process and led to a review of its procedures.

UK Pre-Release of Budget Information (2013): In 2013, it was discovered that some traders had gained access to the UK government's budget information a day before its official release. This breach resulted in regulatory investigations and legal actions against those involved.

Australian Bureau of Statistics Data Leak (2016): In 2016, the Australian Bureau of Statistics had to delay the release of its employment data due to concerns about leaks. The incident highlighted the importance of maintaining data integrity and security in the release process.

European Central Bank Data Leak (2016): The European Central Bank had a data leak in 2016 when it accidentally released sensitive market-moving information to a select group of media organizations a day ahead of the official announcement. This breach raised questions about data handling procedures.

Kim Zussman adds:

NGOs too:

Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001

Eric Lindell asks:

Relative to which indicators would you say their data reflects reality? The government misdirects on so many things, why would their data be reliable? Cost projections for scientific or national security projects are not reliable. Remember when they redefined unemployment to make it drop a few points? Didn't they stop reporting M2? Didn't they lose a couple trill in the pentagon budget? Have recently reported CPI numbers reflected actual costs to consumers? From what I've seen in stores, CPI numbers seem low.

Nils Poertner answers:

exactly. Eric, or see this Gell-Mann amnesia effect. People (not just medical doctors) correctly knew about "misreporting" related to some viral infections, but then read the WSJ and think CPIs numbers are all correct.

H. Humbert comments:

My take is the labor market is just fine and doing exactly what we want to see. Labor participation is rising. Demand for workers is falling.

Sep

5

Foundational ideas

September 5, 2023 | Leave a Comment

as long as the old gray mare can keep ahead of the rivals, the S&P is bullish. the reg capture is supreme and is much more important to the damage of agrarianism.

one is interviewing some interns and as foundation i told them to remember 3 things: (1) eveything is deceptive. (2) there is a general uptrend of 50,000 a century. (3) all is geared for the house to always win in short term and long term.

what would you add to that of a foundational nature? be sure not to let the volatile moves force you into oblivion? Perhaps my punctuation and spelling will improve and i will be able to post a picture like the old gray mare with his shirt off on the beach.

Steve Ellison responds:

Beware the vig … "always copper the public play" … "the form always moves away from public knowledge" (Bacon) … "Borrowed money is the lifeblood of speculation" (Carret).

Vic replies:

good lessons to follow.

Vic's twitter feed

Aug

19

In response to the President’s rant, the data shows that Payroll Tax Receipt growth turned negative in March 2022. Despite an “almost” rally last Christmas season, the Payroll Tax growth has been negative the entire time. The data shows the current rate of decline at ~2 percent per annum. Given the vehemence of the rant, any government official who might be tempted to say otherwise might lose his/her career. Reminds one of “The Emperor’s New Clothes”.

Ayn Rand: We can ignore reality, but we cannot ignore the consequences of ignoring reality.

Bud Conrad comments:

Your work on taxes is the best I've seen. It is a bit of a tle cycle indicator confirming economic slowing. as seen in the standard government numbers below.

So has the government hidden that we are in a recession with cooked up numbers, say from understated inflation so real GDP looks more positive than it really is? and that unemployment is low from birth death over additions to jobs, and disabilities not in the workforce?

Bill Rafter responds:

IMO it’s misdirection. The government picks something on which they want us (and the media) to focus. Usually it’s the unemployment rate, which is determined by a poll, and then they have the birth/death adjustment (i.e. the fudge factor). So it’s impossible to get a definitive “just the facts, ma'am” story if the gummint wants otherwise.

Regarding leads/lags, the payroll tax receipts numbers are accumulated electronically. There have been days when Treasury was closed, but the data was released anyway (automatically). That data is released with a one-day lag from when it hits the Treasury bank account.

The raw Payroll Tax Receipts data just looks like static. To make sense it must be seasonally adjusted (it’s highly seasonal). That is why it is ignored by gummint and the media, because they do not know how to seasonally adjust the data. MRL and DB have shops that work with the data and their output is barely intelligible.

Stefan Jovanovich adds:

As Bill knows better than any of us, "employment" is the category box that compels the people writing the checks to add contributions to the American-Prussian scheme that protects the worker through unemployment payments. Neither self-employment (i.e. real estate brokers) nor independent contractor (Uber drivers) is a worker category that requires employment tax payments or has eligibility for unemployment.

Larry Williams writes:

I would argue, with vigor, that stocks predict tax receipts; it is not the other way around. Lead time is a little over one quarter. Stocks (red) lead receipts:

Steve Ellison writes:

Anecdotally, having been removed from a payroll a few months ago, I am having the most difficult job hunt of my life, not at all what I would have expected given the headline unemployment rate of 3.5% (I'm an experienced data analyst with a passion for finding truth and extracting insights that lead to actions and better business decisions. I have thorough knowledge of data warehousing, SQL, optimizing queries in big data environments, and data visualization). Boston Consulting, where I know a partner, laid off 20% of its workforce this year.

Despite the sanguine reports from the BLS, Pete Earle examined state-level data in May and found rising trends in initial claims for unemployment and in WARN filings (advance notices of layoffs as required by the Worker Adjustment and Retraining Notification Act).

Stefan Jovanovich comments:

There is also the problem of delay. The Census produces a count of the receipts of what they call "Non-Employer" entities using income tax returns. Everyone who is self-employed and reports income as an individual separate from any business dba and everyone who is an independent contractor falls into this category. Today the Bureau proudly announced that "we tentatively plan to release the 2021 Non-employer Statistics estimates in the spring of 2024."

Jul

12

you keep hitting it to the opponent's weak backhand, but despite the good strategy, the opponent is near match point. the zeal with which the opposition is gloating over the fissures in the opponent is belied by the score.

despite the best efforts of truly knowledgable bettors like mad dog, they can't surmount the 52% hurdle.

Steve Ellison adds:

Most casinos in Vegas have now added triple zero to their roulette wheels, so even more gamblers will lose more than they have a right to. 7.7% house edge??

Vic continues:

in line with the roulette wheels with 3 zeros, on my platform is a prominent command: 'flatten everything'. one is waiting for a command flatten and reverse everything.

One hasn't heard from the chronic bears lately making fun of me as to when the S&P will make an all-time high. it appears that in Nov 2021, the S&P index was in the 4600-4700 handle and futures were in 4700 handle.

Steve Ellison comments:

The S&P 500 looks very much like it is making a Lobagola along its 2021 price trajectory (orange line). If this pattern continues, the new all time high should arrive by December. I don't know how to test this hypothesis, so for the moment it remains a conjecture.

Vic continues:

thus we are about 5% away form ATH at 4700. if the devoted father increases his prob of winning to old, we should surmount. let all S&P bulls hope for more news of cog decline and hand in till.

Mr. Wonderful's utterances are the perfect example of a distraction display used by so many animals in nature.

at 4500 S&P, we are 5% away from ATH. where are we going? europeans have finally caught up with July, up a few months in a row. S&P should close at ATH. also depends on reg capture.

Vic's twitter feed

Jun

15

no matter how high they go, most gentlemen don't like stocks. nor do they realize that bonds have to go up to save the banks from marking down their holdings.

10 Qualities of a Modern Gentleman

seems like a good day to review all the reasons that the former president didn't win in 2020. lets start with the big pharma that withheld the announcement that they had an effective vaccine until the day after the election.

Steve Ellison replies:

Marginal voters proverbially vote their pocketbooks, and Mr. Trump had the misfortune to be the incumbent as GDP abruptly contracted by 9%, and unemployment rose to 15% in April 2020.

Vic writes:

yes that's a winner although no evil hand in that. let us not forget the military in their advocacy and demeaning and threats. all the three-letter agencies and the doj. scores of 4-star generals comparing Pres to Mussolini and guaranteeing that they would escort him out of office if he resisted. the professional sports leagues all acting to undermine. Director Wray negating all of Trumps critiques about their bias. another reason for the former golfer to lose was the lineup of all of the Fangs to do whatever they could to do him in.

Gary Boddicker adds:

Constitutionally questionable executive and judicial changes to voting rules in key states, bypassing legislatures and favoring Democrats. “It’s unsafe to vote in person!”

Vic continues:

excellent book for those who like Patrick O'Brian but aren't see salts. none of O'Brian's erudition but author made valiant attempt to research incident.

The Wager: A Tale of Shipwreck, Mutiny and Murder

Also: Shantaram: A Novel

a critique of my methods, lifestyle and answer is elicited on twitter. i don't know when exchange took place - i would guess 15 years ago. I would add to my defense that I was much younger then and also I did not take account of ability of market to squeeze you and margin you out. they and the market inexorably get together by an evil hand to manipulate prices and margins so that you will contribute to the big players so that one day they will do you in and then prices will get back to their norm. one solution is to have good credit. Imagine the palindrome having enuf confidence to withstand the Bank of England and all the banks they control to speculate against the Pound successfully.

Vic's twitter feed

Jun

1

In the first quarter of 2023, container output contracted by 71% compared to the previous year, with only 306,000 TEUs produced, marking the lowest level since 2010. Drewry estimates that full-year production will not exceed 1.8 million TEUs, the lowest since the recession-hit year of 2009.

Container Production Slumps to Lowest Level in 14 Years, Says Drewry

Henry Gifford writes:

What sort of time lag can be expected between ordering the containers and their actual use? I order cardboard boxes, and they are used to ship goods a few weeks later, I expect a shorter time lag for larger cardboard box users. But I expect it takes time to ramp up steel container production and delivery.

Stefan Jovanovich responds:

Top 10 Shipping Container Manufacturers In USA

Steve Ellison adds:

Maybe the shipping container industry does not have just in time inventory replenishment, or maybe it did, but the policies did not survive the covid pandemic. In a previous career in supply chain management, I needed to be aware of how inventory and decision lags downstream in the supply chain amplified demand fluctuations upstream, on manufacturers for example. This is known as the bullwhip effect.

Pamela Van Giessen comments:

There was an article in the WSJ earlier this year/late last year (the months seem to fly by) that shipping has fallen off a cliff. Part due to less goods needed/wanted, overstock because of covid era over ordering, and backlogs having caught up. Could it be there is an oversupply of containers based on things normalizing and/or a temp decrease while everything catches up?

I have been interested in knowing what the rail freight looks like but haven’t been able to find a source that provides that info (also haven’t looked that hard). Living in a rail town, it was much definitely quieter 6 mos ago than it has been lately. But maybe it’s just more coal out of the Powder River basin for China, India, etc. At least 3 long trains of coal/day. Every time I hear the environmentalists cry about CO2 emissions and how we have to get rid of xyz in the US, I have to laugh at the latest pet peeve (gas stoves & furnaces, increasing energy efficiency in dishwashers, wash machines, etc), it will never make a dent against all that coal being fired up in other parts of the world.

Jeff Watson offers:

Baltic Exchange Dry Index

Stefan Jovanovich adds:

Container Shipping Industry Faces Unprecedented Slump in Long-Term Rates

The container shipping industry experienced a significant downturn in global long-term freight rates during the month of May, as the contracted cost of shipping containers plummeted by a staggering 27.5%, according to Xeneta’s Shipping Index (XSI®). This marks the ninth consecutive month of rate drops and represents the largest monthly fall ever recorded on the platform.

May

29

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

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

Hernan Avella responds:

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

Vic asks:

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

Jeff Watson offers:

I wrote this in 2009 about vig:

The Vig Keeps Grinding Away, from Jeff Watson

Steve Ellison comments:

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

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

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

Hernan Avella disagrees:

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

Zubin Al Genubi responds:

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

H. Humbert comments:

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

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

Alex Castaldo adds:

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

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

Nils Poertner writes:

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

Henry Gifford comments:

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

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

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

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

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

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

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

Big Al adds:

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

Hernan Avella critiques:

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

Henry Gifford responds:

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

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

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

Larry Williams comments:

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

May

18

‘Like a chairlift up Everest’: Once running’s supreme challenge, has the value of a four-minute mile diminished?

"[Peter] Thompson has previously worked with running brand Hoka to develop carbon-fiber-plated shoes and delivered a workshop on the performance-enhancing effect of “super shoes” and “super spikes” – as they are now ubiquitously known – at the World Athletics Championships in Eugene, Oregon, last year.

The carbon plates, Thompson says, function as “spring-like devices” and give runners more energy return compared to traditional shoe models.

According to data he collated, between 30 and 38 athletes competing in NCAA Division I indoor track races ran sub-four-minute miles each year between 2015 and 2021; that figure has increased about three-fold over the past two years to 90 in 2022 and 97 in 2023, he says."

Larry Williams responds:

I've been running is these [carbon-fiber-plated shoes] for 2 year. not sure about bounce but much easier on your legs = better endurance.

May

10

Lately I have seen a lot of "sell in May" analysis with this being a good example:

Chart of the Day: Sell in May S&P 500

So I looked at all SPY years and calculated the returns for two periods: (1) "summer", end of May to end of October, and (2) "winter", end of October to end of May:

For owning "summer", $100 became $186.
For owning "winter", $100 became $790.

Seems like a clear victory for "sell in May", except for what they always leave out: buy and hold over the whole period turns $100 into $1474.

H. Humbert adds:

It's obviously a much more ridiculous idea if you consider capital gains taxes, which would be short-term if you truly buy and sell for the winter.

Jeffrey Hirsch replies:

Issued my Best Six Months MACD Sell Signal on April 25 for Dow and S&P. Everyone gets so hyper focused on "sell in May", they forget to "buy in October and get themselves sober," as I like to say.

I tweeted on this last week.

Larry Williams provides perspective:

Never forget: Prior to 1950's best was to buy in may to make some hay….Long gone but once in the data.

Jeffrey Hirsch responds:

Thanks for the Reminder Larry! So true. Here's the chart I use to make that point:

Steve Ellison writes:

For any seasonal pattern, I ask, "Who is the sucker at the table who will buy too high at one time and sell too low at a different time?" And do said suckers have a reason to continue their behavior into the future? The late Mr. E said that a lot of money flows into the stock market at the beginning of a new calendar year as, for example, high-income people who maxed out their 401(k) contributions the previous year can resume.

There was an annual cycle of profitability at the multinational technology company where I worked for 20 years; conveniently, their fiscal year end of October 31 aligned exactly with the Best/Worst 6 months thesis. First quarter, ending in January, was usually strong as it included both the Christmas season and the end-of-year "budget flush" in which corporate managers had to spend any surplus lest their budgets be cut the next year. Second quarter, ending in April, was also usually strong.

Third quarter, ending in July, tended to be a bit weaker as summer started. Fourth quarter, ending in October, was a mixed bag as back-to-school selling season was offset by European businesses mostly shutting down in August. But with commissions and bonuses on the line, the sales force would work 24/7 in the second half of October to close deals and bring in a strong quarter.

Additionally, with third quarter results being reported in mid-August while Wall Street was in the summer doldrums, the company was disproportionately likely to report any major writeoffs or other bad news in the third quarter.

Feb

27

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

Leo Jia responds:

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

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

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

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

Steve Ellison adds:

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

Feb

27

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

Statistical hypothesis testing in trading strategy development

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

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

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

Steve Ellison comments:

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

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

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

Big Al adds:

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

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

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

Zubin Al Genubi writes:

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

Jeffery Rollert responds:

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

Nov

10

72 years looks like more green than red to me:

Steve Ellison adds:

I have a similar graph on my Twitter page that I annotated with each year's most convincing reason to be bearish. There is always some plausible-sounding reason why the market should go down, but we see on the Senator's chart how much more green there is than red. I adapted this annotation format from a similar chart in Venita Van Caspel's 1983 book The Power of Money Dynamics.

Oct

27

really a sign for things to go other direction sometimes. eg, the moment Tchernobyl engineering team got awarded prize - 1 year before the disaster. your typical trader eventually buying his dream house or so and bragging about it to friends etc etc. maybe USD bulls brag now? or 30yr bond bears?

bragging is far more subtle than one imagines. most academics brag (via the number of articles they write), even in social groups they do (look how clever I am since I can do this or that or have this insight.)

sly traders don't brag as they prob have been alone in the trenches so many times, WW1 like trenches…its is cold there and dark and lonely :) so they kind of know.

Steve Ellison suggests:

There was a whole chapter about hubris, including statistics on underperformance of shares in companies that bought stadium naming rights, in Practical Speculation.

Stefan Jovanovich corrects the history:

The comparison of sly traders' adventures with WW 1 trenches has its own touch of hubris; it is also bad military history. The trenches were not "dark"; by 1915 both sides on the Western front had them electrified. They were not "lonely". That was the cause of the greatest slaughter.

Based on their experience in colonial wars, the general staffs assumed that packing men into dense line formations was the solution to holding ground. (Holding and retaking ground were the primary tactical objective for the Allies because they had already surrenders to much territory in Belgium and France. As much as the movies, then and now, want to picture the slaughter as a matter of men running upright across open ground and being mowed down by machine guns, that was the smaller part of the killing. 3 out of every 4 deaths and wounds on Western front were caused by artillery barrages against trench lines and rear assembly areas where troops were massed to rotate up to and back from the forward trenches.

Oct

25

professor and I meet as S&P crosses 3800 amid Bloomberg warning on Friday oct 21 that an armageddon in the market seems likely.

at the turn of the century, it was common practice of Gould and Drew to spread rumors of a catastrophe on the market before buying with abandon to cover their shorts. thus the advice when the papers and brokers were most negative to buy . As I was out visiting children on Oct 21 and Oct 24 and the only contact I had with market was the bearish news and data source, i thought back to the days of the manipulators memorialized so well by Lefevre.

Bejan's latest book will be on evolutionary design (e.d.). we discussed the e.d. in the market over the last hundred years. commissions have gone from 10% a trade to zero, but the rake and vig and the chances of making a profit with short term trading has remained near zero.

it is instructive to realize that Livermore went bankrupt 5 times by not realizing the inevitability of the rake and the vig (bid-asked and commissions) to lead to bankruptcy and in his case suicide. The thing I loathe the most is when some well meaning personage says that two favorite books are Reminiscences and Education of a Spec.

guaranteed to happen: the powers that be make sure that, before an election, good news is rampant and reduction of service revenues is off the table forever.

Vic's twitter feed

Steve Ellison adds:

Remembering that the upside down man and his successor are often quoted as being bearish about the stock market, and remembering that they were bond salesmen whose best interest might not be served by clients buying stocks, I recall the fear, uncertainty, and doubt (FUD) technique that the 1980s IBM sales force was known for.

My first job out of college was assembly language programming on IBM mainframe computers that were the standard for large corporations. IBM essentially had a monopoly in this market from the 1960s on, but by the time I started in the 1980s, competitors such as Amdahl were nibbling around the edges of the market by offering "clones" of IBM systems for lower prices.

The IBM sales force's primary technique if they were worried a customer might buy from a different vendor was FUD. The IBM sales guys would come in and cast as much fear, uncertainty, and doubt on competitor products as possible. Other technology sales forces adopted the technique, too. In one example I was involved with while working at a technology company, a competitor's sales person told a customer that our product could not be programmed in Kanji. Kanji is not a programming language at all; it's a writing system for Japanese.

One ought to keep this history in mind when evaluating bearish statements about the stock market by bond fund managers.

Jeffrey Hirsch replies:

Appreciate the reminder, Steve and Vic. Been observing Goldman and other firms doing this in recent years.

Oct

5

Chess.com: 'Niemann Has Likely Cheated In More Than 100 Online Chess Games'

We based this decision on several factors. First, as detailed in this report, Hans admitted to cheating in chess games on our site as recently as 2020 after our cheating-detection software and team uncovered suspicious play.

The interesting thing to me is the cheating detection system.

Big Al imagines:

Trying to imagine what it might be, the first thing that comes to mind is feeding each situation, move by move, into AlphaZero and seeing what AlphaZero would do. If the player's moves match too closely to a program rated 3800, when the player's rating is maybe 1200 points lower, then one must assume the play is computer-assisted.

Antonio Porres Miranda offers:

Statement by Magnus Carlsen

Steve Ellison writes:

I am not sure if the grandmaster is still among us on the list, but I have seen him on social media expressing concerns about what level of due process there is in the event of a public accusation of cheating. He thinks the possibility of being accused might be enough to motivate top players to skip events. For example, here.

Aug

10

Rereading the Count of Monte Cristo with my highs schooler, I am struck by the fact the all the virtuous characters are failures at business (ship owner, tailor, inn owner), while all the evil ones are great financial successes (currency speculators, war profiteers, state bankers). Of course the Count rectifies this. His fortune comes by way of a cardinal in Italy, a secrete cave and 14 years in prison. Perhaps the author's ( Alexandre Dumas) message is that every great fortune has a dark past. Maybe that was true in his day, but ones hopes that is not the case today.

Kim Zussman comments:

Socialism is as old as the bell curve.

Gyve Bones writes:

I'm reading this book too, and have found it really interesting. I picked it up because I'd seen two different film adaptations of the story, one starring James Caviezel, who a year later would portray Jesus Christ in Mel Gibson's "The Passion", and an earlier one from the 1970s. The two were so different in many details that I wanted to see the real story in the book. Both movies were good, each in their own way.

Like Les Miserables, by Victor Hugo, the Dumas story is about French society dealing with the ripple effects of the French Revolution. Both have heroes who are sort of New Christ figures. Both characters are unjustly imprisoned. In the case of Danton, the "Count", it was a case of a corrupt prosecutor during a time much like now, where Napoleon is in exile, and his alleged supporters still in France are being hunted down and imprisoned. It reminds me a lot of this nation, which has sent a former president into exile on an island off the coast of Florida, and there is an official inquisition into his affairs which is imposing punitive political prison sentences on his political supporters, and making it a crime to speak with the former president on the phone, in order to thwart any attempt to organize a campaign to return to office.

There's a point where the Count uses and extols the virtues of hashish which you might want to be prepared to discuss with your teenager.

Project Gutenberg has a very nice illustrated edition of the book available, which is helpful in imagining the scenes described.

I had trouble with the size of the illustrated ePub version for my iOS Books app on my iPad. It's 76 megabytes with the images included and it would crash the app. So as an alternative workaround, I downloaded the image free ePub into the Books app, and keep a web page open on the index of the images, which are named according to the page numbers in the book, and I view them as needed as I'm reading along.

Stefan Jovanovich responds:

Dumas pere was anything but a socialist. He was an aristocrat who was beyond snobbery and sentimentality. Good people regularly get screwed by thieves, frauds and liars; but then, so do the thieves, frauds and liars by each other. That is the "moral" of the novel. The Count succeeds in his quest for revenge by turning the bad guys against one another. He is a truly great figure, and the wiki page does him proper justice.

Dumas was neither a monarchist nor a Bonapartist. He was a republican and a Freemason. The novel makes that very clear; and it got Dumas in real trouble when a second Bonaparte became Fuhrer. Dumas had to flee France for Brussels, which also helped him escape his creditors. Read the wiki page; it is a beautiful exposition of an extraordinary life.

Full disclosure: One of the Stefan's weird (academics don't even want to discuss it) speculations about Ulysses Grant is that he was reading Dumas' novels when he was at West Point when he was supposed to be studying "tactics". Grant did not have a full duplex brain when it came to language and music; he taught himself to read German and French, but he found it impossible to speak or understand the languages when spoken. He loved music, but could not play it or read it as anything but notation (i.e. he could not translate the symbols on the page to sounds in his head). Hence, his joking about himself that he only knew two songs - one was Yankee Doodle Dandy and the other was not. The biographers all assume that because Grant had no verbal fluency, he had not read Jomini. He had; he also knew it was complete crap, but why say so except to start an argument? (Grant definitely did not have the legal mind or temperament).

Gyve Bones counters:

Straw men are easy to knock over. I did not assert Dumas was either a monarchist or a Bonapartist. In the same way, Hugo, son of a mother of the ancien regime and a father who was a Revolutionary, he was a melding of the two, and the novel sort of becomes a Hegelian dialectic about the synthesis which emerges from the thesis (the old order) in conflict with the anti-thesis (the Revolution). Jean Valjean is his synthesis, the New Man, a man of Christian virtues without Christ and the sacraments of the Church He founded.

Steve Ellison adds:

Dumas lived a high life and was chronically in debt despite having a number of bestsellers. I still remember one sentence from the book, "He was denounced as a Bonapartist …" It made me think that the first totalitarian society was Revolutionary France, but I hesitate to make such a sweeping pronunciation in the presence of Mr. Jovanovich. In any case, current efforts to make modern denunciations similarly career-ending are a grave threat to liberty.

Stefan Jovanovich agrees:

Great comment, SE. The French revolution - as an event - has a scale and complexity that can only be matched by the global war that began in Spain in 1936 and China in 1937 and ended in Korea in 1954. What Dumas was describing was its net effect: everyone in France had become so kind of spy and snitch. So, yes, it was the first totalitarian society; but you need to give the Citizen Emperor the same credit that Stalin and Hitler deserve for so thoroughly organizing the tyranny.

Bill Rafter offers:

Pardon me for coming in late to this discussion, but there is a mistake: The tailor was Caderousse, one of the three co-conspirators against young Dantes. That failed tailor then became the owner of the Inn at Beauclaire, who then murdered the jeweler. The Inn itself failed because its location was bypassed by a newly constructed canal. That leaves Mr. Morrel, who failed because he was in a highly speculative business (the hedge fund of its time) and was not diversified. However his successors in the business, Emmanuel and Julie were certainly righteous and successful. They retired to a nice home in Paris.

Stefan Jovanovich writes:

Not mine. Dumas was very much someone who believed that an honorable life was the only one worth living, whatever its financial costs or rewards.

Henry Gifford writes:

When I was growing up in a part of New York City that was populated by about half Christians and half Jewish people, almost none of the Christian adults owned a business – they had jobs. The one Christian adult that I knew owned a business did not attend religious services. All the Jewish adults owned businesses except a few that were involved in organized crime (professional level: state senator, state assembly, etc.).

When I was a child attending a Christian school, they made us sing a song that included the words “oh lord, do until me as you would do unto the least of my brothers”. I didn’t sing it, even though I was required to, as I saw it as a request for the all the worst things that happened to other people to all happen to me. As a child I thought this included blindness, loss of multiple limbs, leprosy, locusts (even though I wasn’t sure what those were) etc.

I have never had a mentor in my life. The closest I came were adults who advised me to “make sure you learn a trade so you will have something to fall back on”, who I made sure to steer clear of after I nodded and smiled and made good my escape. When I was 16 I asked my father what he thought I should do when I grew up. He suggested I go on welfare. I never asked again, or brought up the topic of what I was doing with myself, etc. When I was about ten years into writing a book, I showed the almost-finished version to my parents, figuring they should see it while they were still alive. The only comment they had was a harsh criticism of the grammar on one page, which they insisted I correct. The “incorrect” grammar was part of an insightful and charming passage written by Benjamin Franklin in the 1700s.

A few years ago I was walking past a Jewish community center near where I live in Manhattan. On the bulletin board outside I saw a schedule of upcoming lectures. One was titled “The Five Risks Every Entrepreneur Should Take”. I picture a member of the community that sponsored that lecture stumbling in business a little while being surrounded by people who are supportive, and who applaud the person for trying, and then for getting up and going at it again. I doubt any member of that community would ask the person who stumbled if she or he had made sure to first learn a trade to fall back on, or demand that children sing a song like the one I and my classmates were required to sing.

I still manage to do OK financially. Among other endeavors I own or am part owner of property in nine US states, soon to be ten, all worth much more than I paid (including the properties I am contracted to buy on Monday). And I have never “paid my dues” by spending years doing something I hate, or by gaining all the easily available advantages of being dishonest. But the Christian kids I grew up with? I can’t think of one who owns a business, and I can only think of two who likely have enough investments to carry them for long if they didn’t keep working at their job. And I can’t think of any who seem to enjoy or gain much satisfaction from that which they spend their day doing.

As for the emotional toll religion has taken on people over the centuries, suffice to say that someone once summarized the difference between the emotional state of veterans of the US military during WW2 vs. those who were veterans of the Vietnam War as the emotional state of Vietnam War veterans being the embodiment of the result of one generation of young men being lied to by their father’s generation. Likewise, young people being lied to about what economic decisions they ought to make, meanwhile a different reality is there for the seeing, also has its cost.

When growing up I spent time in Jewish households when I could, as the people there seemed to me to have an upbeat and healthier attitude, compared to the funeral home ambience I sensed in most Christian households. But, of course, most people growing up in the US do not have that opportunity, and fewer take the opportunity if available. Most are simply beaten down by the forces of religious insanity and stay down for life. Just today I was waiting for a train and a person nearby was shouting into her phone on speaker, describing in an upbeat tone her life that struck me as horrible, while she periodically mentioned that “god is good.” Not to her, I think, but I didn’t argue with her.

Bo Keely responds:

henry, this is interesting from our comparative angles. I’ll bet the few kids like u and I would say the same thing. as a child, I also rejected the ‘do unto others…’ because it included negative things.

i also had no mentor throughout life. when I eventually took a teacher test that required answering, ‘describe your first mentor’ I wrote about an admitted imagined mentor.

likewise, when I was sixteen, my mother asked, ‘what do you want to do in life,’ on receiving a selective service notice. It had never donned on me, so I replied, ‘be a veterinarian’ since that was my summer job. that’s how I became a vet.

and, i also have never ‘paid my dues’ to society figuring i never owed any. The only real money I ever made was in rental housing in Lansing, MI with a strategy of buy cheap complexes, fix them up, and rent to tenants receiving monthly checks directly deposited into my account. i still do well financially with 25 published books that sell, on average, one each per month. my financial secret of life is to have negligible expenses. I have gained satisfaction from each of dozens of jobs too, and never lived hand-to-mouth. it’s long-term gratification.

I have reacted to the lies of my father’s generation by retreating from Babylon into an anarchic desert town. each is an independent citizen who thinks god is a stinking mess in the sky, and one should learn in youth to take care of himself.

Kim Zussman adds a coda:

After the revolution apartments and land was confiscated and living arrangements made equitably* by central committees.

Los Angeles voters to decide if hotels will be forced to house the homeless despite safety concerns

*government jobs, military, connections, etc.

Jul

31

When you first start learning a sport equipment seems important. After years of practice and finally mastery you realize equipment doesn't matter. I suppose true. I suppose true life mastery makes you realize you don't even need equipment.

Peter Saint-Andre writes:

Recently I visited an uncle of mine for a few days and, to help while away the time, played a cheap guitar he had sitting around in his attic. I sure was happy to get home and play the nice Taylor 6-string I bought years ago on 48th Street (the now-vanished "Music Row") in NYC.

Steve Ellison adds:

I used my skis for 16 years. Good value for money, but in the meantime designs and materials improved. In recent years, my old skis were noticeably skinnier than those of others riding lifts with me. In March I bought new skis, and I hope I can be proficient with less effort.

Larry Williams writes:

Running shoes have made a major breakthrough with the carbon soles, etc. no way will I ever go back to my old Tigers.

Justin Klosek comments:

Musical instruments can improve over time, too — my Nord keyboard has terrific sounds (and effects) that used to require lots of pieces to achieve. now in one convenient package, and more reliable!

Michael Brush says:

Taylors are nice! Jewel used to borrow them from that store for recording sessions in NYC. She helped put Taylor on the map back then, and cutaways.

Peter Saint-Andre responds:

I bought my Taylor jumbo six-string (serial #690, made at their original workshop in Lemon Grove) in 1988, when Jewel was 14 years old and still living on a far.

Jeff Watson offers:

Interesting list of artists who play Taylors. Much more than Jewel.

Michael Brush replies:

Of course. But she put them on the map. I never bought one. I can't stand having to use Elixirs, and they got way to trendy. I have many Martins and Gibsons.

Big Al offers:

Some quotes from Yvon Chouinard:

You perfect a sport when you can do all of these things with less stuff. The most impressive ascent of Everest was by the Swedish guy who bicycled from Stockholm to Kathmandu and then soloed Everest and bicycled back to Stockholm. That is cool, as opposed to this huge multinational guided thing with computers and internet cafes at the base of Everest.

The more you know, the less you need.

The word adventure has gotten overused. For me, when everything goes wrong – that’s when adventure starts.

Jun

26

History Lessons for Investors, By gene epstein

Steve Ellison comments:

The most valuable things I learned from Livermore were:

1) Do your own work in the market; never seek out or act on tips
2) Old Man Partridge's admonition, "But it's a bull market", lest I ever contemplate selling or going short

Vic's twitter feed

May

23

“You are a ‘Specialist in Panics,’ which means you buy in panics and at no other time. Whenever you are tempted to go in, ask yourself whether a panic exists. If the answer is Yes, then buy; if No, don’t buy.” – from the Magazine of Wall Street, circa 1908.

“Bull markets start in panics and end in booms.” [From the same source. -Ed.]

May

10

…also get sold: spring 2001 and fall 2007.

Zubin Al Genubi responds:

The great bull market ran from 82-2000, but during the mid 80's Volker ran rates up to 17% T Bonds. Lots of pain in real estate but the stock market stayed strong.

Laurel Kenner comments:

I still remember the free toasters banks gave out in 1979 and the 13% money market rates. My dad lost his job and pension for refusing to give inflated commercial RE appraisals for his REIT. The California government, perhaps greedy to participate in the housing bubble, raised property taxes so high that it led to the Prop 13 revolt in 1978, helping set off the Reagan revolution. Oh how the bureaucrats cried over that. By 1984 the Fed had to turn the money back on.

Inflation can result from a complex of factors. Supply issues, government spending, demand for the nation’s products (as in WWI & II, though the latter was temporarily suppressed by price controls). John Steele Gordon did a nice summary of US inflation this month for Hillsdale College’s Imprimus.

Steve Ellison provides the link:

Inflation in the United States, by John Steele Gordon

Jan

16

like the stock market, the worse the news is, the better the stock market's future, especially relevant is the November 2022 elections. you don't have to be a savant to guess that all the powers of the fed along with the usual suspects will be attempting to build a higher S&P.

i once said that the army of fed people including the thousands they support with grants (used by 50% of all monetary economists) only worry about stock markets and now they leaven this with correct pronouns for which they get positive feedback from the universities. my point is that with all the bad news for Blues during past week, certainly a nadir, the chief capitalist Biden increases his odds of winning the presidency by 1%. imagine what he'll do coming around November with all the suspects from the masters 100 to the schools and swamp lined up.

as my learned brother says: "no way that interest rates will be against him come November." In my naive way, i agree with him that this is very bullish for crypto especially around the election.

[Admin: Learned brother Roy Niederhoffer interviewed about crypto and other issues.]

Steve Ellison responds:

Very insightful comments by the Chair's brother about how one might identify Fundamentals underlying cryptocurrency valuations.

Vic's twitter feed

Oct

28

Yes, it is a different mind set and self fulfilling. I am thinking about replacing some wood flooring and got a quote and now makes me think better do it now before the wood becomes less available and/or more expensive. Meanwhile cash is losing 5% this year. Multiply this mindset x 100m people and you get some inflation. Fed won't raise rates, wages won't keep up, but assets should do well until the yield curve is so steep that rates have to go up, which is the big unknown. Who will be our Volcker of 2020s? Does this not make the case for all the supply-siders. You can demand all you want, but someone has to make the stuff.

Steve Ellison adds:

I worked in technology supply chain management in a previous career and have been thinking about a scenario called the "dreaded diamond".

Technology part shortages occurred with some frequency as the transition from designing a next-generation product to ramping up production did not always go smoothly. And even before covid, accidents happened; some years ago, a factory in Japan caught fire. Many specialized components have only one supplier.

What typically happened in shortage situations was that the supplier would allocate the limited supply among the buyers. The buyers would try to game the system by placing 3x to 5x their normal orders, hoping that would increase their share of the allocation. Meanwhile, executives would want daily updates on the situation: how many units were delivered, and what the likely delivery schedule was.

This situation might continue for some months, with buyers continuing to place inflated orders, and the apparent shortage stretching out longer into the future with the higher orders.

As actual deliveries increased, one day, all of a sudden, the buyer would cancel all the excess orders. As other buyers did the same, the demand on the supplier would crash to near zero. This phenomenon of illusory orders that would vanish later was called the "dreaded diamond". A few quarters later, there would be big inventory write-downs because technology products lose value fast as they age.

Maybe some variation of this scenario could occur in the general economy as some of the shortages are alleviated in the course of time. We might find out the shortages have been exaggerated by purchasers trying to maximize their own supply.

Alston Mabry offers:

The Odd Lots podcast (BBG) had a recent episode about the chip shortage, and the guest described this exact scenario, where a customer orders 10x chips and is told by the supplier, "We can deliver 1x chips now, and the rest within 50 weeks." So the customer then orders 100x chips, hoping to get a 10x allotment, after which they cancel the rest of the order. But suppliers must be catching on.

A reader comments:

Sounds like how the Street allocates hot deals. The “pad-my-order-by-a-factor-of-10” move can’t help but to attract attention on the syndicate desk… and the result rarely benefits the customer.

A reader adds:

This has been my base case for some time. Interestingly, I get the sense that complacency is increasing lately, which us odd.

I expect a deflationary shock from overproduction within 24 months, globally synchronized. The delay us from supply chain snafu’s continuing for about another 18 months.

The difference between this and the diamond is deliveries being made and a simultaneous demand drop (ie they get their increased orders).

Hybrid system in time models are rolling out still.

Pamela Van Giessen writes:

This is not rocket science or even dismal science.

Quit testing healthy people for covid so companies that engage in non-Zoom activities can work at capacity and people aren’t "scared" to be around other people. We are still testing well over 1M and sometimes 2M people daily. ~2.5M people were unable to work between June-Sept because of covid. Since there weren’t that many sick people the bulk of them were out of work due to covid related quarantines. And I can promise you they weren’t the zoom class. Supply issues and inflation last as long as covid is a 24/7 threat that "must be conquered."

Our World in Data: Daily COVID-19 tests: USA

Yes, hoarding makes the problem worse but that will evaporate in 2 seconds once we have reliable supply.

Last week I saw a man on a bike wearing a mask in Park County MT where we have nearly 3000 sq mi and a population of ~16k. No helmet but he had a mask on. I should have snapped a pic as it was a perfect illustration of the brainwashing insanity that plagues our economy and health right now. The vaccines may prevent serious illness/death from covid but they don’t seem to be good for much else be it the supply of canola oil, engines, or other health conditions/injuries, etc.

Duncan Coker writes:

The reformers always make the assumption that supply will just naturally bubble forth like a spring constant and unaffected by the world around, be it for labor, capital, services, products. It is assumed no incentives apply and the curve is a vertical line stretching to the the outer limits of the universe. However, this assumption is always wrong and being tested right now.

— keep looking »

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