Do We Become Japan? Is Someone Trying to Say “Fire” Very Quietly in a Crowded Theater?

Trying to pull some recent threads together.  Still puzzling things out myself.  The charts below are the crux of the question.  Look at the bottom (purple) line – the Fed Funds rate –  vs the market-driven rates above it.

  1. The Fed has been raising its (short-term lending) rate since 2016 (purple line).
  2. The market-driven 10 year Treasury rate (green line) barely budged.  The Fed raised its rate zero to 2.4%.  The ten-year nudged up from 2.3% to 3.2% until it tanked back down to 2.6% when the market balked at the Fed’s last rate raise (Fall 2019).
  3. Corporate bonds followed the 10 year.  Which is what they are supposed to do.
  4. The Fed raised the rate it controls.  The market lowered the rates it controls.  All this noise and shouting about the yield curve inverting (when long-term rates are lower than short-term rates) ignored that humans were the ones doing the inverting.  The Fed led and the market didn’t follow.  Just like Greenspan’s “conundrum” years in the mid-2000’s.
  5. Clear as day, the charts below show an impotent Fed.   We have no Wonderful Wizard of OZ who can grant all our wishes.  Just old men making noise and smoke…

It seems pretty clear (to me at least) the bond market’s negative reaction is the mechanical reason the Fed got all dovish and signaled no more rate rises.  If you are trying to lead a charge and the troops start retreating instead…

That explains the Fed’s action.  But it doesn’t explain the market’s reaction.   What the heck is going on out there?  Why are long-term rates (the sum of real economic growth % + inflation % + risk %) only summing up to 2.6%?

  • Is that 2% growth and 0.6% inflation?
  • Or 2% inflation and 0.6% growth?
  • Or 1%-2% deflation and 3%-4% growth?

In some ways the answer doesn’t matter because all of the above are pretty terrifying.  And we HAVE seen this movie before.  In Japan.  That is about as far as I’ve managed to get.  Right now my brain is trying to wrap itself around the weird physics of the current scenario.  What the heck does that section in bold (from the 2019 American Economic Association (AEA) Presidential Address) actually mean?  Is this someone trying to say “fire” very quietly in a crowded theater?

[What is] the role of deficits and debt if we have indeed entered a long-lasting period of secular stagnation, in which large negative safe interest rates would be needed for demand to equal potential output but monetary policy is constrained by the effective lower bound. In that case, budget deficits may be needed on a sustained basis to achieve sufficient demand and output growth. Some argue that this is already the case for Japan, and may become the case for other advanced economies. Here, the results of this paper directly reinforce this argument. In this case, not only budget deficits will be needed to eliminate output gaps, but, because safe rates are likely to be far below potential growth rates, the welfare costs of debt may be small or even altogether absent.

Olivier Blanchard – 2019 American Economic Association (AEA) Presidential Address at the AEA annual meeting on the topic of “Public Debt and Low Interest Rates.” He sets out new theoretical foundations for how to think about fiscal policy and debt. Ben Bernanke provided the introduction.

A bonus graph going back to 1970.  The market once did respond quite nicely to the Fed’s rate moves.  That broke down in the 2000’s.

Posted in Uncategorized | Leave a comment

“Its not a war, Its a Pageant…” Wag The Dog in Venezuela?

UPDATED:  From the FT and per the below:  “The prices of Venezuela’s government bonds have jumped from about 23 cents on the dollar earlier this month to over 33 cents on Monday, while bonds issued by PDVSA, the state oil company, have climbed from roughly 14 cents on the dollar to around 24 cents.

The drums of war have a certain rhythm.  I’m starting to hear that cadence building around Venezuela.  Not to say Venezuela and its government aren’t a disaster.  But that is hardly new news.  So why are we hearing so much about it now?

Because spending American lives and money could pay off nicely for a number of self-interested but influential parties.  Socialism with that neat plutocratic twist – privatize the gains, socialize the losses.

  • Trump et al need a distraction.  Trump failed on the Wall/Shutdown.  He needs to change the subject.  So you start a war and hide behind the flag.  A bi-partisan path so well worn they made a movie about it way back in 1997 (clip below).
  • The old crew wants their kleptocracy back and Florida is a swing state.  Venezuela’s current rulers aren’t Socialists.  They are just a run-of-the-mill kleptocracy who wrested the money spigot away from a prior pack of jackals.  Chavez’s crew took power by kicking out an entrenched 1% club of equally odious, country-wrecking self-dealers.  That upper crust crowd “fled” to their second homes in Florida.  So desperate and downtrodden some may have even flown Economy Class (gasp)!  There they dusted themselves off and started howling for a US intervention.  This should have a familiar echo.  The equally odious, country-losing Cuban kleptocratic exile elite have been howling for the USA to give “their” country back since the 60’s.  The Venezuelans just joined that chorus.  It is no coincidence that (Cuban, Florida) Senator Marco Rubio has “become a lead policy architect and de facto spokesman in a daring and risky campaign involving the United States in the unrest that is now gripping Venezuela.
  • Venezuela has 300 billion barrels of oil, we have oil companies.  Whatever the angle is, the oil companies probably stand to benefit.  The Koch brothers, in particular, own refineries optimized for sludgy Venezuelan heavy crude.  When Chavez turned on them, their first try was to replace that supply with Canadian Tar Sands (why we heard so much about the Keystone XL pipeline).  But why not just get the old gang back at the old source?  With some incremental new profit concessions for handing the slush money spigot back to the prior parasites.
  • Fox news et al need a “socialist” enemy – preferably a Hispanic one.  Alexandra Ocasio Cortez’s crazy Socialist ideas are getting way to much consideration.  That 70% tax on incomes over $10m proposal has support of 59% of registered voters, 45% of Republicans, 60% of Independent voters and 71% of Democrats?!?  Don’t those people understand they might win PowerBall one day? We’ve got the scare those folks back into their self-defeating crouch!   But she’s a good dancer and brutal on Twitter.  So lets attack her via proxy!  OK her parents were from Puerto Rico not Venezuela.  But who really knows the difference?  And dark threats about “Latin American socialists” hits the right nerves for a whole generation of older Americans (see “Cuban kleptocrats” above).
  • $90b in outstanding debt trading at pennies on the dollar but backed by all that oil:   Lets say you buy a bunch of debt at 5c on the dollar and it goes to 25c.  That is a damn good trade.  Worth spreading some bucks around DC to make it happen?  Definitely.  Venezuela probably can’t pay it all off, but those 300b barrels of oil means they can pay off some.  A short pause of responsible behavior to get the debt pumps primed again.   In gratitude for their “liberation.”  Before they get back to plundering the country for private gain.
  •  2020 elections are looming we all need a win!   Enough said.

Lot of upside, no downside.  Nobody important has their wallets or children’s lives on the line.  What’s not to like?

There are two positive (so far).

  • Its better than North Korea or Iran.  If we have to have a wasteful war, Venezuela is a lot less dangerous than some other intervention options.  The lesser of three evils.
  • The Pentagon and Military Industrial Complex haven’t joined the chorus (so far).  We’ve got a few wars simmering.  We probably won’t fire off enough munitions to make a decent profit.  And we risk bogging down in peace-keeping.

A nice little “Wag The Dog” clip below.  A brilliant movie except it keeps ringing true 20 years on.   “Its not a war, Its a Pageant…”


Posted in Uncategorized | 2 Comments

Pay No Attention to the Man Behind the Curtain!

Have sympathy for the Wizard of Oz. And for the Fed. People really really want to believe in a Wizard. In control. Keeping us safe.

Every society carves out this lonely role role that someone must play – Wizard or Shaman or Priest or Fed Chairman. It is lonely because one must never, ever, betray that fiction that you are just as powerless as everyone else. Shuffling and shaking your bone rattle. Hoping it rains.

The Wizard of Oz didn’t get burned at the stake, but a failed shaman might. People forced to confront their collective powerlessness aren’t usually appreciative.  So you keep on banging the drums and shaking the rattles even if the curtain frays.

Not to say the Fed doesn’t have some power. They have 100% succeeded in raising short-term rates. Because they control short rates. 

The collective hope was long rates would follow.  Instead, the (free) market has responded by cranking long-term rates down down down.  Not just the US 10 year.  The German and Japanese 10 years bonds are back to 2016 lows (at or near zero).  

The simple explanation for rates that low?  An admixture of deflation and/or weak economic growth.  The market isn’t always right, but it can be pretty smart.  I (and many others) am hoping for a more complicated explanation that points elsewhere.

This isn’t just perplexing, it is downright terrifying.  Per a quote I recently saw – Warren Mosler has said: ‘Because we think we may be the next Greece, we are turning ourselves into the next Japan’.  Japan’s has been stuck in a deflationary ditch for about 20 years now. Its a hard rut to get out of. 

That scenario should scare the bejeesus out of all of us. That may be why we aren’t squaring up to it. Much easier to turn back to the Wonderful Wizard. He will keep us safe! He is all powerful! Really! Its going to be just fine…

Looking out a few years, I am more worried than I have been in a while.  Perplexing is not good.  Especially with so much recent analysis seeming to focus mostly on the drumming and rattling at the short end of the curve.  Ignoring the silent, free market at the long end.  

POSTCRIPT:  Per a prior post, low rates does mean the equity markets look reasonably valued.  Or the least ugly dance partner for the next few years.  But… 

Posted in Uncategorized | Leave a comment

When the Facts Change, Just Pretend They Haven’t…? QT.

One of my New Year’s resolutions is re-starting the blog. Little Bear is at 16 months, still a bundle of fun, and a bit less work. I’ll probably focus more on Economics/Markets, but range around as before.

I am more than little perplexed by current commentary around the Fed’s QT (Quantitative Tightening) program. This keeps coming up as a cited cause of market’s recent sell off.

That would be fine if QT had followed expectations by driving Treasury Interest Rates UP. But the 10 year bond yield has gone DOWN since the Fed started QT’s planned shrinkage of their balance sheet in October.

QT starts in October, right where the line goes… down!?!

Before-the-fact commentary expected exactly the opposite. All the QT commentary I can find predicted lower Fed buying would drive up interest rates (and challenge the market).  As we go into October, rates went down. Low rates are usually seen as helping not hurting risk-asset markets. Although commentators have stuck to QE as a cause of the market’s troubles.

Something here doesn’t add up. I don’t have a definitive answer myself. I do have some ideas.

  • A crowd surge over-powered any (relatively weak) real world QT impact? The market created a self-fulfilling prophecy keyed to the start of QE. “Everyone” expected higher rates and planned to pull back accordingly – shifting into safe assets. That buying surge would explain the drop in yields (driven by an increase in demand for safe 10 year Treasury assets). Any real impact of QT got swamped by that wall of money. In that scenario, we could have a pretty big market rebound once everyone goes home and changes into clean underwear.
  • QT is (and always was) a red herring just like QE? Arguably QE didn’t do much and the unwinding of it (QT) isn’t doing much either. As Ben Bernanke said in 2014 “The problem with QE is it works in practice but it doesn’t work in theory.” In practice, QE did boost animal spirits. But the theory pat matters. It isn’t clear QE had much real impact on market interest rates (especially long-term rates). QT might not be doing much either. That debate is above my pay grade, but a relatively weak QE/QT effect would square with the “market over-reaction” scenario above.

The real culprit may lie (conveniently forgotten) in the recent past. The failure of the US tax cuts to deliver meaningful long-term stimulus.  Lower corporate rates gave us a one year earnings boost, but no real economic boost.  The market drop may reflect that US just fired most of its fiscal stimulus bullets funding a huge tax cut into an already-booming economy. Leaving it that much more vulnerable when the next downturn comes.

Why blame QT instead of a failed stimulus?

  • Blaming QT helps us pretend someone is in charge.  I always find it odd that Wall Street clings so hard to faith in the Fed. Markets are scary, uncontrolled places. Its easier to sleep at night believing the Fed has the helm. This ignores that the Fed has been pushing up short rates with dismally little impact on long rates so far. Which may suggest the Fed’s wheel is turning the wheel, but the rudder’s broken off. That is a scary thought, but it seems to fit the facts.
  • Blaming QT avoids a lot of politically awkward questions. If you acknowledge the tax cuts failed, you risk the general conclusion that taxes are a lousy stimulus mechanism. You end up bolstering the argument that deficit spending on affluent people (who save it) isn’t nearly as useful as spending on poorer folks (who spend it).  And that is political anathema to most (affluent) investors.  Much better to blame QT instead.     

Out in reality, however, the situation looks both encouraging and dire.

  • The market tantrum might be no more than that. There are certainly headwinds and risks, but the economy seems to be generally chugging along. By mid-year, all may be forgotten. Rates remain low. It is risk-on again.
  • But, when the downturn does come, the US has very few bullets in the gun.  The Fed can’t raise rates any further. So it won’t have much room to cut. Negative rates are a political impossibility until things get really bad. On the fiscal front, we just blew out the deficit on an ineffective stimulus.  And too many people cling to a belief in tax cuts evidence be damned.

In the short term, the Fed seems likely to pause and unlikely to do much if any rate raising thereafter. Especially as they can’t raise rates much without intentionally inverting the yield curve. Unless the market (and long-term rates) shoot up. Besides, the Fed’s behavioral model seems to be “raise rates until something breaks.”  Something just broke.  So mission accomplished. 

In the meantime, those market-driven long term rates remain stubbornly low. This is the most scary thing out there IMHO – implying low growth, deflation, or both.  It is also worrying that (market-driven) long-term rates are showing no inclination to follow the Fed. A broken rudder is a scary thing in any scenario.

In the short term, however, low rates make riskier assets attractive. Earnings multiple relative to those low long term rates look fine. Especially if you have a return target of 5%-7% in a world where risk-free returns are around 3%.

So maybe we go back to “risk-on.” Wary of when we finally do meet a bear. With very few bullets in the gun. But in the meantime, the music’s still playing. So we keep on dancing.


Posted in Uncategorized | Leave a comment

GOP To the Merely Affluent – “Go F**k Yourselves.”

The House Republican Tax Plan’s most perplexing (and schadenfreude inducing) element is how badly it would screw a core Republican voter group.  The merely affluent.  That suburban/urban “I really just don’t want to pay taxes.” voter.

The calculus is clear.  “We’re gladly throwing all you measly 2-to-15 percenters out to the wolves in order to lighten up the sled for the 1% to .01%.

Its pretty amazing how targeted the plan is against at the merely comfortable.  Why?  That’s where the money is.  If you’re cutting taxes on the super-rich, you have to balance the equation on the backs of someone.

  • Eliminate the mortgage deduction over $500k.  POW! to the lawyers and doctors who bought that high-dollar home in that “good” school district.
  • No property tax deduction over $10k.  OOF! Another body blow to home values in those nice suburbs with the good schools.  Especially those prosperous pink-tinged “I’ll whore my vote to anyone who promises a tax cut” “socially liberal, economically conservative” suburbs of the more prosperous cities.
  • No state income tax deduction.  BLAM! to anyone living in any of the prosperous states.  Those Orange County, CA Republicans certainly weren’t expecting that when they voted to cap property taxes with Prop 13 (shifting the CA state funding base to income taxes).
  • Advantaging pass-through income over wage income.  WHAMMO! to anyone who merely works for a hedge fund vs owning one…
  • Etc. etc.

In summary – “We’ll gladly repeal the estate tax for a few hundred families and pay for it with your paychecks and home values.”

The schadenfreude comes from the burst bubbles of so many people who’d fooled themselves into thinking they were part of the protected classes.  Sure the Republicans are slanted toward the rich, but I’m with them right!  They’ll carry me along too!  Won’t they…?  Its like the suckers in a club who’ve paid extra to stand behind a red velvet rope with a dedicated (but cash) bar fooling themselves they’re actual VIP’s.  Meanwhile the real (comped) VIP room with the (comped) bar is someplace totally different.  With this note on the door.

You aren’t VIP’s.  You aren’t part of the protected classes.  Your’re just another bunch of suckers.  Like those anti-abortionists and evangelicals we’ve been stringing along for years.  Or those desperate deluded coal miners and factory workers whose votes we hijacked this cycle.  And if you really think we give a shit, then you deserve to get suckered because coffee is for closers (below).

With Warm Regards – The Koch Brothers et al.

The interesting question is whether those voters will ever listen.  Because even in 2016, the merely affluent “should” have voted for Hillary based on stated policy.  Bernie was right.  She was (and is) a triangulating creature of Wall Street and the merely affluent.  But not (as much) of the plutocratic classes.

Yet so many affluent suburbs dutifully voted for a Jabberwocky Plutocrat/Rural/ Southern coalition party that is (now) dutifully serving its core voters.  And they ain’t them.

“Coffee is for closers.” (click link for Video)

Posted in Uncategorized | Leave a comment

Declining Corporate Profits a Worry!?! Great News (Rising Wages). OK – Good For America if not Plutocrats…

A quick note between feedings (baby Curtis Bear is 3 weeks old and doing great and, actually, giving us little cause to complain).

The markets continue to climb the proverbial “wall of worry (markets’ periodic tendency to surmount a host of negative factors and keep ascending)”  The latest worry is that “corporate profits are rolling overAIEEEE!”  Alongside signs the tight labor market might finally be ticking up wages a wee bit.

Lets ignore the underlying blindered political/social perspective and just look at the mechanics.

  •  Corporate profits have been at an all time high as a % of the economy for ages.  And especially since the 2008 crisis.
  • The other side of that coin is that wages have claimed a declining share of the economy.  Gallons of ink has been spilled over the lack of wage inflation as employment has recovered.
  • Consumer (ie worker) spending is roughly 70% of the economy.

So Capital might (finally) losing ground to Labor.  If you want a less political formulation – the engine driving 70% of the economy is finally getting a little more fuel in the cylinders.  And pumping fuel into that consumer/worker engine is a heck of a lot more productive than super-charging the capital/financial side of the economy.

  • Worker’s propensity to spend is high.  A dollar in their pocket is going to (mostly) turn into a dollar spent.  Going into the pockets of another worker.  lather, rinse, repeat.  Monetary velocity goes back up and the whole economy gathers speed.
  • Capital’s propensity to spend is LOW.  Rich people save.  A lot.  Plowing “extra” dollars back into financial assets.    Driving up the price of assets but doing little for the “real” economy.  Sound familiar?

The first signs of a real consumer-led recovery should be heralded as a good thing for the economy.  That’s what real booms (and eventually bubbles) are made of.  OK, corporate profits decline as a percent of total.  But the total is growing faster as a % and that growth is concentrated in “real” sectors of the economy vs finance fun-with-numbers.

This is also probably good news for the markets over the next few years.

  • Yes, corporate profits will face a headwind.  Which means earnings will be harder to come by in the short-term.  Put more bluntly, companies will have to give up a larger share of revenues to their workers and keep a smaller share for investors.
  • But the total pie will start growing again.  What happens when 70% of the economy comes out from under a decade-plus of repression.

The shorter-term vs longer-term risk trade-off in current markets is “animal spirits.”

  • Rich people will feel worse because their share of the pie will be shrinking.  Boo hoo.  But the investor class is largely made up of rich people so…
  • But merely prosperous people (doctors & lawyers & etc…) will start to feel the pulse quickening around them  The retail investor will come back.  Probably to be fleeced yet again, but I digress.
  • The average Joe will start to feel better.  And that’s what fills the streets (and stores) with upbeat animal spirits.

The question is which cycle kicks in when etc etc.  But the overall trend is pretty darn good.  unless you are a dog-in-the-manger plutocrat type.  More on that later.

Posted in Uncategorized | Leave a comment

You Broke It, You Own It. Selling Out for 30 Pieces of Silver? Venal. For 30 Wooden Nickels? Just Dumb.

Disaffected Rust Belt voters aren’t the only people that gave us Trump.  He also owes his office to people that should (and did) know better.  “Socially liberal, economically conservative” suburban affluent Republicans.  Educated, otherwise thoughtful people who ignored his stench, held their noses, and voted for “Team Republican.”

The bet they made?  From recent NY Times piece “I Voted for Trump. And I Sorely Regret It.

Those of us who supported Mr. Trump were never so naïve as to expect that he would transform himself into a model of presidential decorum upon taking office. But our calculation was that a few cringe-inducing tweets were an acceptable trade-off for a successful governing agenda.

Or if I might summarize.

“We handed our country over to a madman in return for 30 pieces of silver tax cuts.  And now he’s stiffing us!?!”

This was always a cynical bet.  It was also a dumb one.  Their dumb fantasy wasn’t Trump.  It was that today’s Republican Party actually HAD a “successful governing agenda.”

The health care debacle wasn’t Trump.  The “tax reform” debacle isn’t Trump.  The infrastructure debacle isn’t Trump.  Those debacles are Ryan & McConnell rummaging in an incoherent grab bag of negativist sound bites masquerading as policy.  Policy incoherence that was obvious long before Trump came along.  Provided you wanted to see it.

So why didn’t “Team Republican” see it?  Tribal loyalty?  Yes, but to what?  Its not the man, its the graven image, holy of holies, fetish totem underpinning that particular fantasy faith.  Tax cuts!  Because that’s what “successful governing agenda” really boils down to.

You gotta say “tax cut” to yourself in your best Gollum voice like “my precious my precious” to really get to the underlying emotions.  Or read from the self-pitying Gospel according to Louise Linton (Ms Mnuchin).

“Have you given more to the economy than me and my husband? Either as an individual earner in taxes OR in self sacrifice to your country?  I’m pretty sure we paid more taxes toward our day ‘trip’ than you did. Pretty sure the amount we sacrifice per year is a lot more than you’d be willing to sacrifice if the choice was yours.”

The fantasy was/is that no real-world tax cut wasn’t/isn’t going to amount to much.  The math didn’t add up,  doesn’t add up, and never will add up.  Maybe for Sheldon Adelson, the Koch brothers, and Mr Mnuchin.  But that affluent suburban voter was looking at maybe an extra few thousand bucks.  That barely pays for the kid’s travel team fees.

Which makes the whole bet even dumber.  Judas got 30 pieces of silver.  These folks sold their country to a madman for 30 wooden nickels…  Now?  You broke it, you own it.

Posted in Uncategorized | Leave a comment

Bannon Wasn’t Pushed. He Jumped. Rats and Sinking Ships…

The papers are all saying Steve Bannon was fired from the Trump White House.  But he was clearly the author of his own fate.  To borrow a phrase, he “self-deported.”  Yes he was pushed.  But Bannon rolled out the gangplank, set up the shove, and choreographed the landing.  Why get yourself fired?  Because rats aren’t stupid.  Rats leave a sinking ship.

Consider the timeline and facts:

So why did Bannon do a Scaramucci on himself?

  1. Bannon saw writing on the wall after Tuesday’s debacle.  Time to get off the Trump trainwreck.
  2. He couldn’t resign “on principle” because the Charlottesville marchers are “his people.”  OK, most Breitbart News readers aren’t Nazis.  But a lot are soft sympathizers.  The same demographic targeted by the Neo Nazi “Daily Stormer” – people who start a sentence by saying, “I’m not racist, but …
  3. Bannon also needed to go out with a bang.  To retain his brand value.  And to set up a “I fought the good fight” Lost Cause narrative.  Which Breitbart rolled out one day later on Saturday – “With Bannon gone, there is no guarantee that Trump will stick to the plan. That is why — too late, in retrospect — conservative leaders wrote to the president Friday to advise him that Bannon and campaign manager-turned-counselor Kellyanne Conway were too valuable to lose.

That “Lost Cause” narrative is doubly appealing to his readership.

Those Breitbart-reading, history-bending, Southern apologists are also a core voting base of Republican party.  Bigger and MUCH more core than a lot of “socially liberal, economically conservative” taxes-hating coastal types care to acknowledge.  Its a harder truth to ignore after Charlottesville.  But if you divert a LOT of emergency power to your personal reality denial field….

Sailing off on a ship of fools.  Captained by a madman.  But deserted by its biggest, most cunning rat.

Posted in Uncategorized | Leave a comment

What if Tillerson Goes Out With a Bang?

Sec State Rex Tillelrson seems likely to leave soon.  He’s a sensible guy.  Used to being taken seriously.  And presumably cares about his reputation.  What if he leaves with a bang?

“I can no longer serve in good conscience under this President.  I have seen this man up close and he is not fit to be President.  I have come to mistrust his temperament, judgement, and honesty.  I have lost confidence in his leadership.  He is a danger to our national security, prosperity, and democracy.  It is time for Congress to exert the leadership and power entrusted in them by the Constitution.  I call on them to begin impeachment proceedings against this man before more harm is done.”

You can dream right?  Although President Pence scares me from a pure policy perspective.  But Trump just plain scares me these days.  And I am a patriot first.

And this isn’t just my own wish fulfillment.  It is also Tillerson’s best exit route.  He comes across as a principled man.  Calling a spade a spade.  And he gets credit for being the first person to say out loud what most Republicans is already thinking privately.  He might as well go out on the right side of history.  Especially as there’s no reward for loyalty.

More important is that same logic applies to all the other “adults” in this Administration.  If Tillerson doesn’t take that path, someone else will.  Eventually.  Maybe Jeff Sessions jumps ahead of Tillerson?  Maybe they do a double-header Thelma and Louise style?

I’ve gotten two big calls wrong this past year.  The election (I went with the odds so not feeling too bad about that…) and the chaos that followed (I just lacked the imagination to think it could get this bad).  Its no comfort at all to realize I’m in pretty good company on both fronts.


Posted in Uncategorized | Leave a comment

Robot Markets Giving Me The Heebie Jeebies. No (Human Readable) Information in the Price… Mostly Brownian Motion

Everyone is searching for the “ghost in the machine” and just won’t admit that the “machine” is what drives price action.

A friend sent me that comment recently.  It crystallized what’s been giving me the heebie-jeebies about today’s markets.  Its not really the price level or valuation.  Its how those prices are getting set every day.  How things are trading.

Back in the good old days (say 2010) you could pull up a chart and “read the tape.” There was useful and valid insight in how the price moved.  That isn’t some old market saw.  Price information is the core of all Economics models.  That is all a price “is” – information summarized.

These days?  There is no freaking information in the price!  To be more specific, there’s less and less human readable information.  Why?  On most days, most trading is by algorithms (“robots”) not humans.

So the thing setting the price is, well, a thing.

So a lot of the information/logic reflected in that price is non-human.  A lot of people shrug at this.  They assume the programmers are still programming to mimic humans.  Their mental model has robots as speedy but still human-style investors.  Like a Mr. Spock in Star Trek – wider-ranging, faster, breadth of inquiry unclouded by emotions.  But still comfortingly human-like.  Which is also how a lot of humanity-ambivalent investor types see themselves at work and too often at home too, but I digress…

A lot of people assume that is still how robots trade. They don’t.  And haven’t for a long time.

Now?  Its robots programmed to prey on last-generation robots that were built to prey on even older robots that have long since become lunch.  Imagine a spiral of snakes eating each other’s tails down down down into the obscuring mists of long-past time.  (“Turtles all the way down” but with cannibal snakes! How was that for a mixed metaphor!).

More fundamentally, the robots aren’t understandable by humans.  Most people really really don’t understand this.

“Unlike some other sciences, you can’t verify if an ML [robot] is correct using a logical theory. To judge if an ML it is correct or not, you can only test its results (errors) on unseen new data. The ML is not a black box: you can see the “if this then that” list it produces and runs, but it’s often too big and complex for any human to follow…  It gives the too big to understand linear algebra producing the results. It’s like when you have an idea which works, but you can’t explain exactly how you came up with the idea: for the brain that’s called inspiration, intuition, subconscious, while in computers it’s called ML. If you could get the complete list of neuron signals that caused a decision in a human brain, could you understand why and how really the brain took that decision? Maybe, but it’s complex.”

I’m NOT actually too worried about sharing the pool with a bunch of hyper-predatory neural networks.  Maybe I should be.  But I stick to things humans do better – anything but fancy math.  Especially avoiding math on well-bounded, machine-readable data sets.  An army of robots have already chewed that data six ways to Sunday from cross-correlation angles you or I would never even dream of.  Oh and we’re magnitudes slower at it to boot.

What’s giving me the Heebie Jeebies is that “too big and complex for any human to follow” traders inject nonsensical (to humans) information into the price.  Making an already faint narrative thread even harder to tease out and follow.  As the quarters age, the narrative thread fades behind a rising tide of Brownian Motion.  The ghosts in the machine bumping into other ghosts for reasons beyond our ken.

Brownian motion or pedesis (from Ancient Greek: πήδησις /pέːdεːsis/ “leaping”) is the random motion of particles suspended in a fluid (a liquid or a gas) resulting from their collision with the fast-moving atoms or molecules in the gas or liquid.[1]

More in a following post.

FYI the best “how to read the tape” guide I’ve seen is a book published back when prices were literally tick-tick-printed out on ticker tapes….  Get past the first @50 pages to adjust to the language and its a great read as well =>  Edwin Lefèvre’s  Reminiscences of a Stock Market Operator.

Posted in Uncategorized | Leave a comment