Category Archives: Economics

Does A Record High Dow Mean My Population Model Of Investment Pricing Is Wrong?

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If you’ve been following this blog since the beginning, you may know that I take a fairly dim view of investment.  If you haven’t read the linked article, you’ll want to do so before continuing or the rest of this won’t make much sense.

Today’s market news is that the Dow Jones Industrial Average (DJIA) made new record all time highs, eclipsing the previous highs from 2007.  This is, as news goes, only sort of important   The DJIA long ago ceased being particularly relevant when compared to the S&P 500.  The concept of Dow industrials and comparing them to DOW transportation stock to generate market signals (that’s “Dow theory” for the uninformed) has more or less been laid to rest by modern confusion about what constitutes an “industrial” stock.  For example Microsoft is part of the DJIA, but most of their products are licensed bits, not physical things delivered via a truck or rail car.  As a result their delivery won’t trigger business for transportation firms, and the whole point of Dow theory really doesn’t apply.  Given that, the DJIA is now pretty much a joke.  It’s just 30 big US stocks.  None the less, the DJIA lurches on like an unwanted extra in a zombie movie.  And of late, it’s been lurching up.

Contrast the DJIA’s behavior to my theory linked above about investing in the US.  The theory is basically that the supply of investments is proportional to working population  and the demand for investments is proportion to late-career working population.  In other words, the older the work force the more expensive/overpriced investments will be.  My logic was that as the baby boomer demographic (by far the largest in the US) hit retirement in 2000 and on average started to divest assets, asset prices would peak and start to fall in real dollar terms.  So a new high in the DJIA raises the question: am I flat out wrong? Continue reading →

This Post is Brought to You By The Number 72

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I’ve been reading and commenting on a lot of finance blogs lately, and as a group they’re beginning to piss me off.  I’m not talking about the recycle your toilet paper folks.  Those guys are unintentionally hilarious.  And I don’t really care one way or the other about the debt bloggers.  Good luck paying that off – seriously, I really do wish you the best.  But I can’t help you with anything more than platitudes and common sense since I’ve never paid off a debt more interesting than a month worth of credit card purchases.  And you can’t help me since I’ve got no debts to pay off.

No, the blogs that are pissing me off today are the ones giving well meaning but poorly though out investment advice. Continue reading →

We Have Met The Enemy And He Is… Dumb?

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If reading this blog hasn’t convinced you that I’ve got a huge ego, well, let me make another attempt.

Once of the best things that happened to me back when I was just learning to play poker was discovering that many of my opponents were dumb.  I don’t mean tourists uneducated about poker or gambling in general.  I mean dumb.  I’m talking about the sorts of people who regularly lost that ongoing battle of wits with their VCR (yes, those things) to record at the right time on the right channel.  The sort of people who can’t make correct change without counting on fingers and/or toes.  Dumb.  I’d be sitting there at the table, and suddenly out of the blue one of my opponents would say or do something so profoundly stupid that I knew right then and there I was facing a blithering idiot.  I remember one lady very earnestly explaining how she used astrology to figure out what her lucky hands for the day were.

Now, why was this such a big deal?  Because I was new to the game and needed courage.  When you’re a newbie it’s easy to believe that everyone else is better at the game, and at least within those limited confines smarter than you.  So it’s refreshing when someone hangs out their “stupid” sign.  Until that lady opened her mouth, I honestly believed she might be a better player than I was and that I might be in over my head.  Turns out I need not have worried.

Trading is the same way. Continue reading →

QE & The Power of Language, 9-14-2012 Edition

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Previously I’ve written about the way bond math and in particular bond spreads have the power of language. They tell you things you wouldn’t otherwise know.  And today is an example of them being particularly talkative.  I don’t usually write about current events, but in this case it serves to illustrate an important point.

Unless you live under a rock, you probably know there was a big Federal Reserve announcement yesterday. Continue reading →

Sure the Market is Rigged (and a Theorem)

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“I am not superstitious, but I avoid situations in which I continually lose.” -Barry Greenstein, Ace on the River

I led an article with this quote before, but I consider it so key to understanding the markets that I’m going to blatantly re-use it.  The topic I want to discuss is the “rigging” of the markets.  As far as I can tell people have been complaining about rigged markets as long as there have been markets to rig.  The complaining seems to go on at a constant background level, but my perception is that the volume has picked up since the crash of 2008.  The nominal target of the whining changes over time.  In the 80s it was brokers, “boiler rooms”, and program trading.  In 2008/9 is was bailouts and the Plunge Protection Team.  Recently everyone’s bitching about quantitative easing and high frequency trading (HFT).  Five years from now it will be something we haven’t heard of yet.  At every turn the market is rigged.

If you want to succeed as a trader, you absolutely must not participate in this sob fest. Continue reading →

Let’s Find Out

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I want to convince you of something.  It runs contrary to good old fashioned common sense, and yet I believe it’s true.  Consider:

When you encounter an economic opportunity where it’s totally unclear if you have the best of it, frequently the best thing to do is risk some of your money and time and find out.

This could be though of as the anti-business-school method.  Business grads spend plenty of hours figuring out how to analyze a business or opportunity, investigate the competition etc.  That’s great.  But it’s worth a little time to think about what happens if you give up on the B-school method entirely and instead learn about business by doing business.

Ideas like this are of course best illustrated by old gambling stories… Continue reading →

Beware the Politics of Debt, Inflation, and Gold

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You don’t have to spend very much time poking around the financial side of the internet before you run into an internet economist.  You probably know the guy (and it’s usually a guy).  He’s very eager to point out that:

  • The US is running a massive federal budget deficit, and as a result has accumulated an even more massive national debt.
  • The US will eventually be unable to pay that debt via taxation, and will thus have to print money to pay it.
  • This printing of money will cause massive inflation eventually turning to Weimar Republic style hyperinflation.
  • If you want to protect your assets in this environment, you should buy gold because gold is real (as opposed to fiat) money that can’t be printed.  So while everyone else is being inflated away, you’ll be safe and secure.

You’ll see a few variations on this argument.  For example, the advanced internet economist might suggest to you that holding gold is not enough – it must be physical gold  in your personal possession (as opposed to gold in someone else’s vault, gold futures, gold miner stocks, or a gold ETF).  The reasoning here is that physical gold in your possession presumably can’t be easily confiscated or otherwise regulated by the government.  Either that, or the internet is full of would-be Scrooge McDucks.

Now, don’t get me wrong.  McDuck aside this argument is chocked full of indisputable facts and sound economic reasoning.  It seems like it ought to be right.  There’s only one problem: 1985 just called, and they want their bullet points back. Continue reading →

A Speculative Alternative To Investing Part 2: A Theoretical Foundation Based on Valuation

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(Part 1)

If we’re going to achieve the relatively dramatic speculative goals laid out in part 1 of this series, it’s going to be essential to find financial instruments which are incorrectly priced and for which we can thus predict future price movement.  But before we can do that, we need a solid understanding of the source of those pricing mistakes and how to detect them.

Thankfully, this is not a place where we have to re-invent the wheel. Continue reading →

Naive Markets, Hostile Markets, and Random (Efficient) Markets

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“I am not superstitious, but I avoid situations in which I continually lose.” -Barry Greenstein, Ace on the River

I want to get a few terms defined that I’m going to use in subsequent posts.  Specifically, I want to talk about the way predictive methods and markets interact.  My experience is that there are three basic classes of interactions:
Continue reading →

The College Formula

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Every once in a while I get the urge to write about economic issues that have nothing to do with trading.  There’s been a lot of online discussion recently about the value and cost of college.  My personal take on this is that college is very valuable if you choose an institution and major which teaches something you want/need to know and then put in a reasonable level of work.  Without at least my undergraduate computer science degree, I’d be much worse off in terms of both my engineering career and my trading.  That said, I feel the cost of college has spiraled out of control at many institutions.  There are lots of reasons for this, but I believe reason #1 is that would-be students and their parents are horrible shoppers.  They have no idea what various college services ought to cost, so they have no idea what they ought to be paying.  All they know is vaguely what they want to buy.  This is analogous showing up at the car dealership knowing you “want something nice” but having no idea what any of the cars ought to cost, and being determined to buy something no matter what.  It’s not hard to see how such an auto shopper would get totally screwed.

I figured I’d do my little part to rectify this problem. Continue reading →