Category: Economics

Boone Pickens Interview

May 12, 2008

I had the opportunity to interview Boone Pickens in person about 18 months ago. A nice recent interview (video) with him from Bloomberg.

$600?

April 26, 2008

This whole concept is a joke. I am for less taxes, but this is pandering.

Ominous

March 15, 2008

From UK's Telegraph:

Big American finance houses have collapsed before. Continental Illinois required a $4.5bn (£2.25bn) bail-out in 1984 after coming to grief in Texas as the oil boom deflated. The giant hedge fund Long Term Capital Management was saved by a club of banks in 1998 under the guidance New York Federal Reserve. The fund blew up after Russia's default, which ravaged its portfolio of Danish, Italian and Spanish bonds. On both occasions the US economy was in rude good health. The damage was quickly contained. The implosion of Bear Stearns is more dangerous. A host of other banks, broker dealers, and hedge funds have played the same game, deploying massive leverage at the top of the credit bubble to eke out extra yield. Dozens of them are saddled with the same toxic debt - sub-prime property, credit cards, auto loans, and mountains of unsold paper from the merger boom. This time the market for default insurance is flashing bright red warning signals across the entire spectrum of US finance. The swap spreads on Lehman Brothers rocketed to 465 yesterday, mirroring the moves in Bear Stearns debt days before. Fannie Mae and Freddie Mac - the venerable agencies created by Roosevelt that underpin 60pc of the $11 trillion mortgage market - had a heart attack on Monday. Their bonds were in free-fall, threatening to set off another cascade of bank writedowns. These are not sub-prime outfits. They sit at the apex of the US mortgage credit industry. Hence the dramatic move by the Fed this week to offer a $200bn lifeline, agreeing to accept Fannie Mae and Freddie Mac issues as collateral. Had the Fed delayed, many traders believe Wall Street would have plunged through resistance levels risking a full-fledged crash. The 'monoline' bond insurers - MBIA, Ambac, and others - that guarantee most of the $2,600bn market for US municipal bonds have seen their shares collapse by 90pc since the Autumn. They are still battling to raise enough to capital to save their 'AAA' ratings. Should they fail, the insured bonds will be downgraded in lockstep. Pension funds would be forced to liquidate huge holdings. As New York Governor Eliot Spitzer said before his own liquidation, such an outcome is too dreadful to contemplate. You have to go back to the banking crisis of the Great Depression to find a moment when the financial system as a whole seemed so close to the precipice.

Ain't Socialism Grand?

March 11, 2008

Nice comment from The Big Picture.

Damn Dollars!

March 03, 2008

A great comic noticed on The Big Picture.

The Fed Stays Mum

February 28, 2008

A perspective I share. That doesn't mean I am predicting anything, but the rate cuts, rate increases and rate cuts have driven the last 6-7 years.

The Mind of the Market: The Case for Capitalism from an Evolutionary Perspective

February 20, 2008

An excerpt from The CATO Institute (full article and video):

In his new book, The Mind of the Market: Compassionate Apes, Competitive Humans, and Other Tales from Evolutionary Economics, Michael Shermer examines such questions as: How did we evolve from ancient hunter-gatherers to modern consumer-traders? Why are people so irrational when it comes to money and business?

Note: Richard Dennis, father of the Turtles, is still on the CATO Board of Directors. A CATO paper from Dennis.

Subprime Primer Slideshow

February 17, 2008

A fun overview in the form of a slideshow.

Euros in NYC City

February 09, 2008

NEW YORK (Reuters) - In the latest example that the U.S. dollar just ain't what it used to be, some shops in New York City have begun accepting euros and other foreign currency as payment for merchandise.

Milky Way Inflation

February 06, 2008

I am no monster sweet tooth, but I do know today was the first time that I have ever bought a normal size candy bar (not one of the monster ones) and have had the cashier ask for more than $1 dollar. Price? $1.01. Inflation? Prices just about everywhere are rising. So does the Fed save real estate and stocks or curb inflation? And if they sputter around with no real plan, what next? Anyone else have the feeling the ride is just beginning?

The Economics of Repugnance

February 02, 2008

Alvin Roth, an economist at Harvard University, asserts that people don't pay enough attention to how repugnance affects decisions about what can be bought and sold. It is yet another bias under the umbrella of behavioral finance.

A Rich Person’s Definition of Rich

January 27, 2008

A net worth of $1.4 million will put you in the top 5% of Americans, but what does that really mean?

Fed Folly

January 24, 2008

I admit when it comes to commentary on the Fed's actions of recent I am lazy in a sense. It's just too easy to let Ritholtz say it because frankly he says it so damn well:

Was it a misunderstanding of their mandate, inexperience, or just plain hubris? Regardless, it took only 2 days to learn just how ill-considered the Fed's emergency market rescue plan was: To wit, a fraudulent series of losses led to a major European bank unwinding a huge trade: Societe Generale Reports EU4.9 Billion Trading Loss. SG's $7.1Billion dollar unwinding led to panicked futures selling on Monday and Tuesday. Hence, we quickly learn what sheer folly and utter irresponsibility it is for the Fed to use its limited ammunition to intervene in equity prices. Their panicky rate cute were not to insure the smooth functioning of the markets, but rather, to guarantee prices. As we have been saying for the past two days, this is not the Fed's charge. They are supposed to be maintaining price stability (fighting inflation) and maximizing employment (supporting growth) -- NOT guaranteeing stock prices. I guess the European Central Bank has it easier: Their only charge is to fight inflation: "maintain price stability, safeguarding the value of the euro." Tuesday's panicked 75 basis cut will prove to be an historical embarrassment, a blot on the Fed for all its days. Failing to understand what their responsibilities are is bad enough; allowing themselves to be bossed around by Futures traders is inexcusable. And, having been rewarded for their past tantrums, the market will now be screaming for another 75 bps next week. As Rick Santelli appropriately observed, the Pavlonian training is now complete.

One of the posters to his comment offered:

Barry the Fed had to do it. The market was almost certain to crash. All the baby boomer's retirement money would have went up in smoke and it almost certainly would have caused depression.

That's where some are in their understanding of markets? The boomers better get ready to fill those Walmart greeter positions.

Feeding the Lion

January 23, 2008

You feed the lions. They have not been fed for a long time. You throw them some monster steaks. They swallow those whole and look back at you with their mouths wide open. More rate cuts (steaks)?

Ritholtz Nails It

Sums it up doesn't he?

Human Action

January 19, 2008

It is much easier to read the hard copy of his book "Human Action", but an online free version of Ludwig von Mises' classic treatise can be found here. This is the foundation of all proper economic thought. Of course, every few years those who know better, those who profess to care more, come along with means and methods not rooted in Mises' work. The alternatives always fail.

Unintended Consequences

An interesting take from the Freakonomics guys.

China

December 17, 2007

No shortage of information here.

The Search for "Value": Sometimes Everything Is Nothing

December 10, 2007

An interesting take on the search for value.

Do you support the Treasury's plan to freeze rates on some mortgages?

December 06, 2007

Vote and explain. I am no fundamentalist, but this sure seems like a sign the dollar ain't going up any time soon!

Ben Stein on Goldman Sachs

December 03, 2007

NY Times article.

Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't

November 25, 2007

Are free market economies really based on fleecing the consumer? Is the U.S. economy truly just a giant free-for-all that encourages duplicity in our everyday transactions? Is everyone from corporate CEOs to your local car salesman really looking to make a buck at your expense? Watch.

When a Pack of Cigarettes Costs $222

November 17, 2007

Kip Viscusi, who teaches economics and law at Vanderbilt Law School, has written widely and well on the risky choices that people make, especially smoking.

Chinese Toy Import Hysteria

November 10, 2007

Come on. China is huge. It is diverse. However, isn't America not reaching a point of hysteria when all you hear coming from US media are stories about "Chinese toy problems"? If the average American visited China they would see far more going on than the silly media portrayals of Communists making dangerous toys for American kids. American is quickly becoming protectionist in a world that could care less. There is too much capitalism outside the US and they don't need our permission to make money. Toy problem? The buck stops with the company who sells the toys in the US. If they sell bad toys, they are responsible.

Embrace China

November 06, 2007

From the AP:

Former British prime minister Tony Blair said on Monday that the world must pay attention to the rise of China and try to understand the Communist state in order to build alliances with it.

Will the West ever get past the "fear"? I am in China (Macau) right now. This place is exploding. Everyone here appears excited about business. EVERYONE is a capitalist. What is there to understand? How come The Venetian (and Sheldon Adelson) understands it, but the former PM of Britain doesn't get it? Enough politics. China is here. They are an economic engine and they are not slowing down. If you can't get that, well, you are going to miss out on some severe investment opportunities in the years to come.

The Catastrophist View

November 05, 2007

What would it take to send the U.S. economy into free fall? A doomsday primer. Be very afraid (or something like that)!

1980s Parallels?

October 26, 2007

An interesting piece by Barry Ritholtz.

This Is Never Good

October 13, 2007

Bailouts? Crap. Read.

Want A Dollar?

October 06, 2007

Wallstrip tackles our worthless dollar.

Miami Real Estate: Documentary Marches On

October 04, 2007

You can't do a documentary on markets and investor behavior without taking a first hand look at one of the most volatile real estate markets in the world: Miami. Can't say enough good things about Miami, but clearly there are winners and losers there, just like every other market. Why do some win and some lose there in real estate? That's my question.

Trading Spaces from Portfolio.com

September 30, 2007

A nice overview.

Interview with Nobel Prize Winner Dr. Vernon Smith

September 21, 2007

I interviewed 2002 Nobel Memorial Prize in Economics winner Dr. Vernon Smith on camera today. My big question: where were the professors like Dr. Smith when I was in school?! What did we talk about? Markets, the history of markets, exchange, investor behavior and a whole host of subjects. A prior CNBC interview with Dr. Smith.

Winners Come Forward

September 15, 2007

Some winners from the summer volatility.

What Is A Market? A Simple Story About Depends.com

September 13, 2007

What is a market? To some people it is a simple question, not worth their brainpower, as they already get it. Those readers can go ahead and tune out, but for many others it is confusing concept. To many highly educated people the term simply doesn't resonate. They can't wrap their arms around it. I have an odd and simple example of a market (albeit a limited and illiquid one).

Years ago (back in 1997 I believe) I bought the domain name depends.com for $100 (among the hundreds of domains I bought across the board on all subjects). While the reaction of many might be that I was violating Kimberly-Clark's trademark, they would be wrong. Their trademark was 'depend' (no 's') and I never did anything with my 'depends' domain to damage or infringe on their trademark. Bottom line, 'depends' is simply a word and a great domain.

That said most people know adult diapers as 'depends' (with the 's') not as 'depend' (Kimberly-Clark's brand name). Not surprising Kimberly-Clark (symbol: KMB) first came to me in February 1998 to try and buy the domain depends.com. They offered $100 USD to "reimburse" me for the registration fee. I only paid $100 for the domain, so I immediately felt their low-ball offer and reasoning ("reimburse") was not serious.

In September 1999 they offered $500 USD.
In December 2000 they offered $250 USD.
In March 2001 they offered $2000 USD.
In January 2002 they offered $2000 USD.
In July 2005 they offered $4000 USD.

After 2005 I forgot about the domain and their offers. My market only had one bidder, Kimberly-Clark, and I had no time to actively build up bidders. It just was not on my radar screen, which was perhaps foolish because I have made $100,000 USD over the last 8 years selling a handful of domains. A nice part-time hobby if you will.

This summer though an article about a domain auction house caught my eye. I figured that perhaps they could create a market of more than one bidder. They listed depends.com and 7 people bid on it. Here is the bidding:

Bidder 6 Aug/23/07 12:34 PM EST 15,499 USD
Bidder 7 Aug/23/07 12:29 PM EST 14,999 USD
Bidder 7 Aug/23/07 12:28 PM EST 13,000 USD
Bidder 6 Aug/23/07 07:49 AM EST 10,100 USD
Bidder 5 Aug/20/07 01:13 PM EST 10,000 USD
Bidder 4 Aug/19/07 12:23 AM EST 1,000 USD
Bidder 1 Aug/18/07 02:54 PM EST 750 USD
Bidder 4 Aug/18/07 06:55 AM EST 600 USD
Bidder 1 Aug/17/07 05:02 AM EST 400 USD
Bidder 3 Aug/17/07 02:42 AM EST 350 USD
Bidder 1 Aug/17/07 01:34 AM EST 250 USD
Bidder 2 Aug/16/07 07:55 PM EST 200 USD
Bidder 1 Aug/16/07 03:31 PM EST 80 USD

The final sale price was $15,499 USD (small change in the big scheme of things of course).

The auction was anonymous, but WHOIS is not. Today I found out that Kimberly-Clark was the buyer after all these years. A market is ultimately a buyer and a seller agreeing on a price. That's it.

Postscript: I would be curious to hear from others about their analysis of the biases and opportunity costs of both Kimberly-Clark and myself regarding this transaction. To me, on a very low scale, low dollar amount, this transaction represents "markets" well.

These Ain't Trend Followers!

August 02, 2007

Why Do Retirees Buy Big Houses

June 24, 2007

The guys over at the Freakonomics blog have a nice comment on a new book that tackles our continuing odd decision-making habits.

Auctions

June 20, 2007

Feedback in:

I really enjoyed your audio comments on the Japanese fish market. You really captured it well.

This reminded me of the time our family had to auction off 2 paintings from a relative's estate. As you might imagine, within the family there was a tremendous controversy about the "true" value of these paintings. Well, in the end, all the people with stubborn opinions stayed away, but only myself and my mother went to the art auction to represent the estate.

I had never been to a serious-level art auction before and it was truly fascinating. They were auctioning off everything from obscure low-value art, up to Picasso works. There were people in the room from all over the world, I could hear French, Spanish, Portuguese, and many more languages being spoken, and there were telephone links all over the world as well. The auctioneer was serious and attentive, but he kept up a good steady pace, and the auction moved along well, since there were more than 200 items to sell (if I remember correctly).

The auctioning of the Picasso amazed me more than anything else, since there was nothing remarkable about the procedure for this painting versus any unknown or obscure artist. The bidding simply determined the price just like any other object.

Keep up your good work on documenting these issues in markets and finance!!

Best wishes, Marc

Tsukiji Fish Market in Japan

June 08, 2007

Sometimes I see very bright people, people with advanced degrees and or accomplished careers, just cringe at the idea of "how" markets work. The simplicity of an auction, what really is happening, doesn't register with them. They seem to think more about it then they should. It becomes overly complicated in their minds. A great way to show and explain stock and futures markets? The Tsukiji fish market in Japan:

The Tokyo Metropolitan Central Wholesale Market, commonly known as Tsukiji fish market is the biggest wholesale fish and seafood market in the world and also one of the largest wholesale food markets of any kind.

I had the opportunity to view and film the exchange for the first time this week. If you get the chance, deal with the jet lag when in Tokyo, haul yourself out of bed at 5am and check this market it out. It is truly a unique experience.

View image.

Gouged by Gas Prices?

June 01, 2007

Give me a break from John Stossel (read full):

Were you "gouged?" buying gas this week? Or maybe over the Memorial Day weekend? Did you pay those record high prices we've heard about? It's time to say give me a break! But & to whom? Drivers we spoke with called gas prices "ridiculous." And the media says it's a new record. Newscasts on CBS, NBC, ABC all announced new record highs. On Fox News, Jon Scott told viewers, "the average price of gas has hit a record high of, get this: $3.18 a gallon." Well, get this: It's not a record high. That's what they say in the media, but it's only a record high if you don't adjust for inflation. And that's just silly. You might as well say the movie "Rush Hour II" made more money than "Gone with the Wind." The media ought to quote prices in real dollars, but maybe when they get excited, they just don't bother. Once you adjust for inflation, it turns out gas cost more 25 years ago, in March 1981. When the 1981 price is converted to 2007 prices (not 2006 prices, as the EIA did), last week's average price of $3.22 is seven cents below the record, $3.29, which by the way was a monthly average.

Boone Pickens: "Stop Demand with Price"

May 07, 2007

James Altucher at Stockpickr.com writes:

T. Boone Pickens is perhaps the world's greatest oil investor. He's been drilling for oil, buying oil companies and running oil-based hedge funds since 1951 and right now he's saying oil will top last year's high of $78.80 and break through $80. "You will have to stop the demand with price," he said at a recent Milken Conference.

Some of the best one-liners around! And while he says that, and there is no doubt he believes it, Pickens, while using different technique than trend followers, makes his big money off of big trends.

Why the Rich Get Richer

April 03, 2007

Read article 'Why the Rich Get Richer'. That article got me Googling around until I found another piece of research tangentially related, but definitely interesting.

Download PDF.

Subprime Mortgages: Don't Worry the End is Probably Not Here!

March 19, 2007

The following comment is not meant to pass along a fundamental view about what direction you should take trading certain mortgage lenders. Rather it is a nice logical view from Ben Stein on the true economic impact of the troubled lenders we have all been hearing about:

Today, the reason is supposedly terror in the subprime mortgage market. To put this as frankly as possible, this is just nonsense. Even if subprime delinquencies and defaults are up, they're a tiny portion of total mortgages. Suppose 13 percent of subprime mortgages are in default. Subprime itself is less than 15 percent of total mortgage debt, so that means that roughly 2 percent of mortgage debt is delinquent or in default. Yes, that's more than it used to be, and is a disaster for the subprime mortgage companies. But when a mortgage defaults, the lender takes back the house or condo, sells it, and usually recovers about 75 percent of the loan value or more. That means the real loss would be about 25 percent of 2 percent, or 1/2 of 1 percent. In the context of a market as huge as the nation's mortgage market, that's not a lot. A few companies will go bankrupt, and someone will make a killing buying their bonds and portfolios at a huge discount as they turn out to be worth a lot more than people thought in March 2007. But it won't mean a lot to a roughly $14 trillion economy, of which the subprime mortgage market is a tiny blip.

Mankiw’s Ten Principles of Economics, Translated

February 28, 2007

"The cornerstone of Harvard professor N. Gregory Mankiw’s introductory economics textbook, Principles of Economics, is a synthesis of economic thought into Ten Principles of Economics."

What are those and what do they really mean? Read.

Mankiw’s Principles:

#1. People face tradeoffs.
#2. The cost of something is what you give up to get it.
#3. Rational people think at the margin.
#4. People respond to incentives.
#5. Trade can make everyone better off.
#6. Markets are usually a good way to organize economic activity.
#7. Governments can sometimes improve market outcomes.
#8. A country’s standard of living depends on its ability to produce goods and services.
#9. Prices rise when the government prints too much money.
#10. Society faces a short-run tradeoff between inflation and unemployment.

Yoram’s Translations

#1. Choices are bad.
#2. Choices are really bad.
#3. People are stupid.
#4. People aren’t that stupid.
#5. Trade can make everyone worse off.
#6. Governments are stupid.
#7. Governments aren’t that stupid.
#8. Blah blah blah.
#9. Blah blah blah.
#10. Blah blah blah.

What Does This Mean Exactly?

January 23, 2007

I don't say this to take any particular political stance, but Jim Webb (rebutting the Presidential State of the Union) said tonight that the increased profits of US corporations need to be "shared" more with everyone. On the face of it, Democrat or Republican, that type of talk is scary. What does it mean exactly? And my comment is not an endorsement of anyone tonight or any other issue. My perspective is simply a Seinfeld-esque reflection on that one comment about "sharing".

Lou Dobbs Blames Everyone in "War on the Middle Class"

December 08, 2006

I caught a town hall meeting on CNN hosted by Lou Dobbs titled 'War on the Middle Class'. The premise was how to replace manufacturing jobs that have left Buffalo, New York. The angle was predictable. Union workers stand up and complain about jobs going overseas (cheers and applause as "rich" guys are blamed). One guy said there should be tariff on all imports into the United States. That is brilliant. Wouldn't that hurt all of the middle class who shop at Wal-Mart buying goods primarily made in Asia? Others say that government can fix it all and get America "back" to where it was. Others blame the government for not giving enough education.

I say nonsense. Jobs go overseas due to market forces, not to punish union workers. Corporations exist to make money, not to take care of people cradle to grave. Life is not fair and there are always challenges, but blaming everyone for your situation is a waste of time. Maybe instead of this town hall meeting they should have actually told everyone "how" market forces work. Just pacifying people with pie in the sky dreams of bringing back the 1950s doesn't help anyone.

Why bring this up? These kinds of attitudes will kill anyone whether entrepreneur or trader. It's you against the world. Get educated. Get angry. Make something happen, take 100% responsibility and please don't look to the government for your wealth.

Boone Pickens Interview

October 03, 2006

I mentioned the other day I was meeting with a trader in Dallas. Well, that 'trader' corrected me today during the interview. Boone Pickens prefers to be called an investor and doesn't consider himself a trader. To hear about his +600% for 2005 is simply inspiring. He is the rare man whipping Wall Street when many of his peers have retired. I don't get the impression Boone Pickens is slowing down - he seems to be picking up speed at 78.

Trading 'Binaries' at HedgeStreet

July 19, 2006

The exchange HedgeStreet sent me a news release the other day on binaries (PDF). A useful primer and exchange for many traders. My hope is that they will also eventually go the route of providing much longer term options like LEAPS®.

David Harding Responds

July 14, 2006

David Harding recently responded to a letter to the editor. I have had the opportunity to spend some time with David for an interview; he is a very sharp guy. Here is the published letter and his response (PDF).

Problem: The Majority of People...

July 03, 2006

A good presentation found recently (PDF) covering 'Successful Communication using Behavioural Finance'. A quote from the powerpoint:

Traditional Finance is more concerned with checking that the price of two 8oz bottles of ketchup is close to the price of one 16oz bottle of ketchup, than in understanding the price of the 16oz bottle.
-Larry Summers

Plunge Protection Team

June 30, 2006

George Stephanopoulos outlines the Plunge Protection Team:

"I don't know if you remember, but in 1998, there was a crisis called the Long Term Capital crisis. It was a major currency trader and there was a global currency crisis. And they, at the guidance of the Fed, all of the banks got together when that started to collapse and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall."

Read full article (PDF). To all free market players this is unfortunate news.

Masters of the Maligned

June 18, 2006

Since so few articles are written on short selling, take a read (PDF).

Dear Graduates: Money Is a Means

May 29, 2006

The recent NY Times article "Dear Graduates: Money Is a Means" by Daniel Akst is good reading for all those still denying the importance of money in life.

Continue reading Dear Graduates: Money Is a Means »

Enron's Legacy

May 28, 2006

A good piece of reading (PDF) on Enron's legacy...it's not what you think. An excerpt:

"It has been forgotten, because of the unfortunate things that happened at the top, that Enron had a good group of people who were very innovative," said Robert Shiller, an economics professor at Yale University whose 2000 book "Irrational Exuberance" predicted the stock market crash."

The Future of Futures

May 21, 2006

Leo Melamed offers this perspective on the future of futures (PDF). An excerpt:

"Clearly there will be new financial scandals. Long Term Capital Management, Enron, WorldCom, Allied Irish Banks taught lessons that greed will quickly erase. While those scandals caused some hand wringing and finger pointing at derivatives markets, by and large they did not impede their growth. Indeed, one can make the case that while such scandals result in intensified scrutiny by regulators, they often serve to increase rather than decrease the use of risk management applications provided by our markets. Above all, such scandals often underscore the need for transparency that is best provided by organ- ized futures exchanges."

Ben Stein on Oil

May 15, 2006

Ben Stein lays out strong thoughts on the responsibility for high oil prices here (PDF). An excerpt:

"The energy companies -- by and large and with some exceptions -- just go out into the market, like you and me shopping at the grocery store, and buy oil, process it, and then sell it with a small markup to pay them for their efforts and to reward their stockholders for risk. This profit is pennies compared with what stock brokerages, software makers, and other major U.S. companies earn on a percentage basis of sales. In other words, the oil companies are just messengers announcing to energy-consuming Americans the news about oil prices."

I agree 100%. Later he adds:

"As for me, I question if the commodities boom can go on forever. I have some of the funds I just mentioned, but not a lot. Commodities booms come and go -- historically, they've never gone on forever. If you think this one will, here's a hint. When people say, "Hey, this nonstop boom has never happened before," and someone responds, "This time it's different," hold onto your wallets. "This time it's different" is one of the most frightening phrases in economics. It's entirely possible that the next move for oil is a long step down. Then won't we be sorry for shooting the messengers?"

I agree here too. The idea, the trend following mantra, is not to predict bull or bear markets, but rather to follow along the market direction with a precise plan for exit always in mind.

Google Follows Trends Now

May 12, 2006

Google is now in the business of following trends at their new site. Read about Google Trends here. Thanks to Jason Russell for the heads up.

Flex Retirement

May 04, 2006

A good article (PDF) on a more realistic way to view the concept of retirement. If you are still clinging to your grandfather's ideal of retirement or to what the union or big company "promised" you, better start changing your ways now. The world is too competitive to just sit back and "trust" that you will be cared for. The government, the union and or the company is not the security blanket in the real world.

Zero-Sum Again

April 18, 2006

I was asked this morning a question from a reader of Trend Following:

"Do you have any references that discuss why the zero-sum concept is critical? The zero-sum concept is interesting theoretically, but seems to have no practical use or meaning. Thanks, John "

I am not sure how you say that after reading every last word of chapters 3 and 4 of my book Trend Following? It is spelled out....especially pages 109-111. I am up for any debate, but not following your foundation here. Hit me back and explain?

Basketball and Economics

April 05, 2006

Of course, I am biased toward my alma mater George Mason, but their recent Final Four run in the NCAA tournament brought forward some interesting analogies - wholly relevant to my typical writings. Consider this story from GMU.edu:

"Economics at Mason a Lot Like Basketball The success of the men's basketball team has allowed many of Mason's academic departments to explore their own achievements. Recently, in an article on Slate.com, economic professors Alexander Tabarrok and Peter Boettke compared the Patriots to their department's own surprising successes. "The George Mason economics department - which didn't even award PhDs until 1983 - has two Nobel Prize winners on its faculty. What's remarkable is that Mason's freewheeling basketball team and its free-market academic teams owe their successes to very similar, market-beating strategies," they wrote. "George Mason University has excelled on the court and in the classroom by daring to be different. Its basketball team and academic programs began with the (correct) assumption that they couldn't hope to compete against the top schools in their fields - say, Harvard Law School or the Duke Blue Devils - by directly imitating their methods." The professors say Mason's free-market-oriented economics department got started "with a heretical premise: The academic market is inefficient, so how can we exploit it? George Mason University knew it couldn't afford to be a first-class MIT and didn't want to be a second-class MIT, so successive chairs of the department, backed by entrepreneurial university presidents George Johnson and Alan Merten, looked for unexploited opportunities." Some of those opportunities included recruiting world-class, but unconventional, academics. "James Buchanan, George Mason University's first Nobel Prize winner, has never had an Ivy League position ... Gordon Tullock, a potential future Nobelist, has no degree in economics and took only one class in the subject. [Nobel Prize winner] Vernon Smith, who moved his team from the University of Arizona (again, no Harvard) to George Mason University in 2001, had to fight to get people to treat experimental economics as more than a cute parlor game." The professors concluded, "The odds are still against George Mason University on the court and in classrooms ... Building with the odds stacked against you is difficult, but George Mason University proves it can be done. Look for undervalued assets, eschew political correctness and take the long view..."

Trend following is still an undervalued asset!

Pequot Capital

April 03, 2006

At his keynote last week in Austin, Byron Wien of Pequot Capital laid out his 10 'surprises' for 2006:

1. Crude goes to $80, but inflation stays low.
2. S&P declines 5%.
3. Fed funds moves to 5%, but US treasury yields stay at 4.5%.
4. Large cap stocks fail to gain ground.
5. Price of gold declines to $425.
6. Dollar gains another 10% against yen and euro.
7. International markets correct.
8. China keeps their currency undervalued.
9. Stock markets are sent reeling by pandemic or another US terrorist attack.
10. Mitt Romney is 2008 GOP candidate and Hillary is 2008 Democrat.

Wien said that he usually predicts 6-7 correct every year going back 20 years. His speech was engaging, but even if he gets 6-7 right we all still need a precise trading plan. If you follow his fundamental advice, you still need these answers before you ever enter a market:

1. How do you determine what market to buy or sell at any time?
2. How much of a market should you buy or sell at any time?
3. How do you determine when you enter a market?
4. How do you determine when you exit a losing position?
5. How do you determine when you exit a winning position?

While Wien's economic advice might be very plausible, he doesn't offer an exact trading prescription for entry, exit, bet size, etc.

Not Rocket Science

March 30, 2006

As I mentioned earlier, my alma mater George Mason is more known for their economics department (one with a certain libertarian flavor) than their sports department. In today's Washington Post, one of their writers ties in Mason's economics team to the current sports run (PDF). An excerpt:

"Think of a basketball game as a vastly simplified proxy for the real world. There are laws that govern behavior (the rulebook), people who enforce those laws (referees), and a way to measure who is succeeding and who isn't (the score). Just as lawmakers can change the way wealth is distributed by changing tax and other rules, changes to the rules of basketball can have sometimes unpredictable effects on what teams score the most, and how. Peter Boettke, a George Mason economist and avid basketball fan, offers an outlandish example: "I can change one rule in basketball and Michael Jordan will no longer be the best basketball player of all time. You could change the rules to require the game be played on stiletto heels. Then Cindy Crawford would be the best player."

Here is a starting point for checking out economics/behavior research at George Mason University.

What is Austrian Economics?

March 20, 2006

From the Ludwig von Mises Institute, take a read of a white paper that answers the question: What is Austrian Economics? (PDF)

Nobel Inspiration

March 03, 2006

Feedback today:

"Dear Michael: I have been convert and believer in trend following for nearly a decade now. Read your book a couple of years ago and visit your site regularly. Thank you for giving us a wealth of information and perspectives. Recently while, researching, I came across a speech by Friedrich August von Hayek, the winner of the 1974 Nobel Prize for economics. In his Nobel Prize Lecture, surprisingly titled The Pretence of Knowledge, the noted economist, philosopher and neuroscientist, Friedrich August von Hayek spoke at length about limitations in human cognitive processes. In the area of social sciences, we have to deal with what he called the 'phenomena of organized complexity'. He explained organized complexity as the phenomenon whereby the nature of units are determined not only by the individual elements of which they are composed, and the relative frequency with which they occur, but also on the manner in which the individual elements are connected to one another. Therefore we cannot draw any general inferences and make specific predictions about the units without having complete information about each element. Since such complete information is unattainable, the best we can achieve is 'pattern predictions' that limit itself to general attributes about the units but not specific predictions about the individual elements that make up the unit. This is something worth bearing in mind when choosing an investment process. Any reliance solely on specific predictions about the various factors that are in play in the financial markets may prove to be unreliable. It is much safer to rely on pattern predictions. With a healthy dose of risk management of course something like a systematic trend following model perhaps."
Kind regards, XXX Investment Manager,
XXX Partners Asset Management,
London

HedgeStreet Exchange: Update

February 02, 2006

I have supported the HedgeStreet exchange since first hearing about them. Their creativity and innovation is a good thing for all traders. Two recent releases outline streamlined contracts and first year trading results at the exchange. Keep an eye on them!

Hedgestreet and Prediction Markets

November 25, 2005

An interesting article on Hedgestreet and a conference to be held on prediction markets on December 2, 2005.

Place Your Bets!

November 03, 2005

Using financial markets to hedge and or speculate on everything will soon be a reality for everyone. TIME magazine offers another take (PDF) on the topic. Hedgestreet, mentioned in the TIME article, continues to lead the pack in creating awareness for these new markets.


Ursula Burger, HedgeStreet

Ben Stein on Energy

October 14, 2005

A good read from Ben Stein called Why Is Everyone Losing Sleep Over Oil and Gas Stocks?

Capitalism or Not?

September 28, 2005

I just watched an interview between Bill O'Reilly and Congressman Charlie Rangel. Keeping in mind that the United States of America spends record amounts on entitlements today, O'Reilly said to Rangel (and I paraphrase):

"You can't help everyone. Some people elect not to compete in a capitalist society no matter how much we spend on entitlements. You can't make people compete and some people don't want to compete. That's the bottom line."

True.

Hedging Real Estate

September 25, 2005

They have been all the vogue, but many of the new markets opening up will most definitely change what we think of as a market "to trade". The Wall Street Journal chimes in:

Once, a home was a castle. Now it is looking more like Fort Knox -- a pile of money in need of protection. Amid warnings from economists that real-estate values in some parts of the country may drop eventually, there is a nascent movement to offer new investment products designed partly to hedge against falling property prices. The goal: Offer limited protection against the risk of riding real-estate prices back down again after the record run-up in recent years. In recent months, Merrill Lynch & Co. and other investment banks have started offering investment products that will rise in value if a basket of housing- related stocks declines. Already, nearly $400 million of these investments have been sold, according to Daniel Carrigan, vice president for new-product development at the Philadelphia Stock Exchange. The Chicago Mercantile Exchange also is preparing to announce plans to introduce in the second quarter of next year futures contracts based on home prices in each of 10 cities. It will also offer a composite contract covering all 10 cities. That plan follows the introduction last May by HedgeStreet Inc., based in San Mateo, Calif., of financial contracts called Hedgelets that let investors bet on a rise or a fall in home prices in six individual cities."

Continue reading Hedging Real Estate »

Economic Event Markets

August 26, 2005

Worth Magazine had some good insights on the new economic event markets such as Hedgestreet.com.

Article Part 1.

Article Part 2.

Also from the NY Times is another article about these new markets.

Interesting Radio Ad

August 07, 2005

While perhaps too "salesy" for me, this radio ad from Hedgestreet continues to move their innovative exchange forward.

Hedging Against a Housing Bubble

June 11, 2005

Read PDF article about hedging against a housing bubble.

EU Jitters

June 04, 2005

The European Union could have us all headed toward some big trends. Read PDF.

Hedgestreet Trading

April 26, 2005

Good overview of Hedgestreet service and concept.

A Chart

April 20, 2005

This sure is a chart worth staring at. What a story it is. Fortunes made and fortunes lost.

Offshore

April 05, 2005

Whether one has a need or not for offshore fund management, this link from Ernst and Young will lead to interesting insights.

Anatomy of Give and Take

March 29, 2005

"Economic theory goes only so far in explaining why people buy, sell, save or trust. Scientists are looking inside the mind for answers." Read LA Times article (PDF).

"Prediction Markets"

January 19, 2005

Chris F. Masse has put together some great links in the field of "prediction markets". I am the first to admit this use of the term "prediction" is misleading. It reminds me of the term "managed futures". Everyone uses it even if it is confusing. The action on these new exchanges is about following the trend, not predicting it.

Hedgestreet.com, mentioned fondly by Chris above, continues to innovate. They have added silver now.

Retirement Flexibility

November 12, 2004

People often ask, "can I invest with trend followers through my retirement program?" Good question. The short answer is that it depends on what kind of retirement program you have. For example, Lincoln Trust offers flexible programs that go well beyond the "standard issue corporate retirement plan".

Along the lines of "retirement flexibility", consider:

"For a quarter-century, a Boston inventor has been obsessed with a single idea: an innovation that would give millions of American workers the chance to borrow their own money from their 401(k) savings plans using a new kind of credit card."

Read article here.

Terror Futures

October 21, 2004

Granted, this was debated some last summer, but this article on "terror futures" is still great food for thought. Download PDF here.

Ethics and Economics of Private Property

October 16, 2004

Ethics and Economics of Private Property.

Reasonable v. Unreasonable

September 13, 2004

"Reasonable people adapt themselves to the world. Unreasonable people attempt to adapt the world to themselves. All progress, therefore, depends on unreasonable people."
George Bernard Shaw

Sellers and Buyers Both Win

August 26, 2004

Do only sellers benefit from exchange?

Hidden Flaws: Behavioral Economics

August 03, 2004

Hidden Flaws in Strategy (PDF) by Charles Roxburgh offers insights into behavioral economics.

Why Capitalism is Inevitable

July 13, 2004

Why Capitalism is Inevitable

Where Do Trends Come From?

July 07, 2004

One source of trends comes from so-called "Shock-Free Monetary Policy".

Capitalism, Happiness, and Beauty

June 29, 2004

Capitalism, Happiness, and Beauty by Ludwig von Mises.

Government Intervention

June 26, 2004

Government intervention is one of the many root causes of "trends". This article won't tell you when to buy and sell or how much to buy or sell, but it does show the forces always there making waves.

Social Work v. Capitalism

June 14, 2004

Excerpts from Wall Street Journal article:

"The conclusion is unavoidable: If you have a good education, you shouldn't just consider getting rich. Creating and amassing wealth is an outright moral obligation. Do so and you can take comfort not just in financing public services but in knowing that you are giving people what they need or want, generating jobs and underwriting the affluence that makes art, justice, environmental protection and other social goods possible...Of course, making yourself a pile of money is good for you too. You'll live in a better neighborhood, drive a safer car, get to be more selective in choosing a spouse and enjoy a longer, healthier life. Your kids will get a better education, which in turn will mean more of the same for them, too -- and will better equip them to improve the world still more...From a moral standpoint, it is clear that Alex has done his part. With such an eleemosynary career under his belt -- and such bulging bank accounts -- he has decided to indulge himself and stop making money. The money he already has is busily reproducing itself, of course, and meanwhile he is spending most of his time figuring out how he can use it to make the world a better place. Sounds like fun, no?"

Source: http://online.wsj.com/article/0,,SB108690610119134476,00.html

What is Entrepreneurship?

June 01, 2004

"...if a formerly good entrepreneur should suddenly make a bad mistake, he will suffer losses proportionately; if a formerly poor entrepreneur makes a good forecast, he will make proportionate gains. The market is no respecter of past laurels, however large. Capital does not 'beget' profit. Only wise entrepreneurial decisions do that."
Murray N. Rothbard

Where Do Trends Come From?

April 26, 2004

Where do trends come from? Isn't the market efficient? Trends often spring from inconsistent government actions. Whether the United States Federal Reserve or regulated beer sales in Norway -- governments never get it right.

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