Institute of Economic Understanding


7/29/2013 Two Thumbs Way Up for Larry Summers

Despite Bernanke's competence in handling of the 2008/2009 overblown crisis, Obama decided to replace him; the front-runners are Larry Summers and Janet Yellen, and while both are experienced, Summers is clearly the superior candidate. Summers is a genius among geniuses. His implacable intellect casts a cone of silence around him, rending all critics speechless- for anyone that dares to engage him in a battle of wits will be left permanently chastened. Even Obama- the most powerful man* in the world- doesn't question his expertise. A typical Larry Summers meeting is a bunch of intellectual inferiors babbling off about something upon which Larry Summers interjects, followed and awe and dumbfounded silence. Meeting over.

During the first term of the Obama administration, Bernanke and Geithner were dubbed the 'competant duo' for thier deft handling of the crisis while Obama took credit, played golf and gave obligatory speeches about the economy and with the usual pithy missives about how things 'will get better' and 'how far we've come' etc. With the duo disbanded, Summers is an invaluable asset - for his ability to respond and fix crisis is unmatched, perhaps only by Bernanke. During the Clinton administration he helped bailout Mexico and Russia during their currency crisis. He teamed up with Greenspan & Rubin to give Long Term Capital Management its much needed funds to stave off financial contagion. In acknowledgement, TIME put Greenspan, Robert Rubin and Larry Summers on the cover as the 'Committee that Saved the World'. Indeed they did, and a decade later he counseled Obama to devise a plan that kept the banks well capitalized with easy 'stress tests', but not to overdo the class warfare rhetoric. Larry Summers understands that Wall St. and multinationals must thrive before mainstreet's turn. The major market indexes and earnigns have doubled since 2009, profits are at historic highs, people are getting richer than ever. If there was a crisis it's safe to say it's over. Mainstreet has lagged in the particpation, but that's OK because the financial sysytem and economy is booming. The next admistration can tackle those issues.

He's unabashedly outspoken, even if it means alienating his political base or jeopardizing his academic career, but this helps him forge allies with republicans in a way that other liberals cannot as well as construct good, pro-growth policy. He teamed up with republicans in the deregulation of derivatives such as the Gramm-Leach-Bliley Act in 1999, which repealed the 1933 Glass–Steagall Act. During the 2012 campaign he and Clinton criticized Obama for wanting to raise taxes on the 1%- or the most productive members of society, because this would hurt economic growth. As president of Harvard he clashed with fellow staff, including the rabble-rouser Cornel West. His analysis that women are deficient in the high-end aptitude necessary for math & science skills was met with immediate criticism and lead to his resignation, but was correct. Many republicans can emphasize with his struggles in a society that has become hopelessly politically correct, and while they may not agree with his stance on some social issues, will nonetheless support his nomination. For a fed chief to be effective, cold logic must have precedent over feelings and emotions; the ability to analyse a complicated situation and device the best solution; to push aside criticism and do what is best for the economy.

*or empty suit

7/26/2013 Facebook Reports Blowout Earnings- Where's the Bubble?

I will give the liberals credit for being consistent - consistently wrong that is. Remember facebook, which in in 2012 after its IPO was immediately dismissed as a bubble by the liberals on huffingtonpost, businessinsider, zerohedge, and nytimes? Yesterday it reported a massive earnings beat and the stock is up a staggering 25% today, or only $5 shy of of its IPO price. What happened to bubble 2.0? Over before it began? lol The left is always predicting bubbles and crisis and always being wrong. They want the fed to raise rates prematurely, for America to be less competitive, for wages to go up too much, for the market to tank, for the wealth to be spread and it refuses to happen. LNKD is trading at 190 and the PE ratio- while still high- is actually less than it was when going public, hence indicating a doubling of earnings in the span of a year. Or how about Angie's List, Zillow, Trulia, Amazon, Google, Twitter? Not only are the valuations of these companies rapidly expanding, but so are earnings. A broken clock is right twice a day, but a liberal predicting crisis or bubbles is never right. They exist for our entertainment - to mock and laugh at.

Dow 16000 soon. People are getting richer than ever with less effort than ever before- an accelerating wealth boom on a global scale.

The harsh reality is that the economy doesn't need you (the middle class) to thrive. But nonetheless, the economy is booming due to tireless consumer spending, massive exports, and relentless productivity. The majority of S&P 500 companies continue to report quarter after quarter of blowout profits & earnings with no end in sight. You have home prices up 25% YOY in the Bay Area. You have companies like Twitter and Tumbler being worth billions of dollars that a few years ago didn't even exist. If some coding and a great idea can make you a multi-millionaire then I would say the American dream is still alive and well. Corporations shouldn't feel forced to waste money hiring overpaid employees if they don't want to. We're becoming a temp nation, and this is good because temp workers provide more economic value than overpaid regular employees. Oh, and then you have Obamacare casting pall of uncertainty for businesses that would otherwise want hire.

Let's create wealth, instead of spreading it around. Let's give congress a round of applause for doing as little as possible by not frittering money on job creation, infrastructure and other worthless programs and for allowing student loan rates to go back up. We need higher student loan rates to disincentivize useless non-STEM majors, but a college degree is crucial to success in a hyper-capitalistic, globalist society which we live in today, but we shouldn't be spreading wealth around. Instead, we need to force people to spend, spend, spend as much as possible to keep the economy booming. Let's max out the credit card, let's keep uploading photos to facebook, let's rent more movies from netflix, because these activities do create economic value - much more so than an overpaid, redundant job. I want more consumer spending, I want buy all dips, I want stocks going up, I want to believe the free market is the best path to prosperity.

7/23/2013 Forever 2008

For certain members of a liberal political party, it's always 2008. Crisis is just around the corner, and leverage, deregulation, and 'obliviousness to risk' is always to blame. We'll probably all be dead by the time by the time there is a repeat of 2008. The financial system is pretty stable when you consider that the media kept referring to it as the worst crisis since the Great Depression. That's an 80 year gap between crisis. Although one could argue financial institutions are more prone to systemic failure today than generations ago, but with only two data points it's hard to draw any meaningful conclusions, so we'll leave it to crisis seeking liberals like Nicolas Nassim Taleb to do that for us, because he insists there are apparently hidden risks that only he can see. 1973, 1987 and 1998 were turbulent years, although it wasn't anything on the scale of 2008.

Taleb's solution is more like starving the beast, which would be disastrous for the stock market & economy while enriching his black swan fund greatly. Taleb seeks crisis and failure not only for personal gain, but due to some ingrained resentment or perceived hurt by an illusory cabal of economists and technologists who are at the root of every problem.

In 2008 & 2009 as the market was falling, deep pocketed businesses and organizations were frantically looking for explanations as to what happened. Behavior psychologists and 'contrarian' thinkers like Taleb, Gladwell, Ariely, DeLevitt & Dubner of Freakonomics fame, etc rapidly rose to preeminence on the lecture & book circuit, because the 'traditional' models had, apparently, in the span of two years, completely failed. Everyone wanted answers, and these pop psychologists would provide it. We are irrational! We can't manage or see risks! Fast forward four years, and we're back to stocks always going up, housing speculation, record consumer spending, record profits & earnings, and record bonuses. Smartism -the emphasis on IQ, which was dismissed in Gladwell's Outliers book, is more important than ever as low paying, low IQ jobs are rapidly being supplanted by smarty jobs, or eliminated at together. The meritocracy and American hegemony has been emboldened, as more people than ever become multi-millionaires and billionaires through speculation and web 2.0 while the USA has the best performing stock market and lowest yields of any developed country. If 2008 was supposed to be a paradigm shift, it was more of a blip and the forever irrational, risk oblivious status quo has resumed control.

Looks like the market is within points of going green. Bernanke ain't gonna do anything. Nothing changed fundamentally between Jan 2013 and now with the exception of some overseas macro hiccups and higher yields- while potentially problematic- is more likely going to blow over. The large cap dividend play will return to favor soon; emerging markets will remain weak.

The path of least resistance is up. fight market = lose money. Economic policy is engineered to make stock go up; stuff like job creation, small biz on the perpetual backburner. I guess dow points have become the new benchmark of economic progress.

7/23/2013 Why Economists Don't Need to Predict

A common criticism of economists is that they are unable to ppredict crisis, such as the events in 2008 & 2009. However, this is not a problem if economists know how to fix crisis- a skill that they have proven to be much more adept at. Economics as a field is very nuanced. For example there are probably a dozen variants of Keynesian economics; however, policy makers tend to do the same thing over and over again, which is a combination of printing money, bailouts and various stimulus programs. Why? Because that's what works. Economists don't necessity have to be able to predict crisis, but they certainly have a knack for keeping them as brief as possible. For example, the DJIA is at 15550 - or 1500 points higher than its record in 2007 just four years after the 2009 bottom. S&P 500 profits & earnings at historic highs, too. This is a testament to the effectiveness of TARP and Bernanke's QE programs, despite the endless criticism by liberals about 'moral hazard' 'risks' etc. The lesson is that we don't need to predict crisis or learn from our mistakes; we only need to have the systems in place to fix problems as soon as possible so the rest of the economy can continue thriving. If there's a problem it can be solved in a matter of weeks or months with the coordination of the fed and Washington.

7/23/2013 Debunking Deflation

Since around 2008 or 2009 economic pundits have typically been divided into two camps- delfationists (Kugman, Delong, Reich, & Feldstein) and inflationists (Schiff, Taleb, Denninger, Ferguson). The former beleive that the ecnonmy is in a deflationary liquidity trap and vulnerable to complete collapse without low rates and stimulus. This is the US=Japan crowd. The later also believes the economy is weak, but that QE is a powder keg of dire hyperinflation. Or the US = Zimbabwe crowd. What if everyone is wrong, except for this blog and maybe a few other people? The US economy is slapping all these pundits across the face because we have contradicting signals. We have have inflation in some aspects but deflationary signals in the bond market. We have the makings of a weak economy such as high unemployment & foodstamp participation, but four consecutive years of blowout profits & earnings and record high stock prices.

Off the bat, QE has been a huge success and there is no liqudity trap. The US is not Japan or Zimbabwe by any stretch of logic. Martin Feldstein & Krugman want to believe there is a recession or liquidity trap when that coudn't be further from the truth. There is inflation everywhere but in the cpi, and this is what the fed wants.

QE is doing what is it supposed which is:
1. prop up asset prices like stocks and real estate. stocks are at historic highs and bay area real estate has surged 25% in just a single year
2. raise cost of living to force consumers to spend more which goes into GDP. this is also working as evidenced by the plunge in the personal savings rate since 2008. Gas, rent, tuition, insurance prices all going nuts partly due to QE.
3. lower rates to make it easier to businesses to repurchase shares, conduct M&A

As I have written numerous times, we've become a nation of crybabies lookinng for crisis where none exists. We want to believe pain at the pump will hurt growth. Or that low labor force participation is something to be feared, instead of celebrated. We are on the constant lookout for deflation or hyperintlation, but ignoring the Goldilocks economy. It's funny reading stories about ppl falling between the cracks. These peope lare losers - the writers of these stories and the people themselves. America is -and will always be- a land for winners.

5/28/2013 Wealth Creation Still Unstoppable

Dow 15550

The left is fighting a losing battle against the inexorable creation of wealth, capitalism, and technological progress.

This market is going nuts, but completely in agreement with my predictions so it shouldn't come as a surprise that we'll probably see dow 16k by this week or next. A get rich quick frenzy, but without the super high valuations, media hype, and high interest rates of the late 90's. We have blue clips rallying like microcaps. Actually, safe big dividend stocks are outperforming mid & small caps in terms of risk/reward ratio (sharpe ratio).The world is swash with infinite liquidity that is flowing into treasuries, corporate debt, municipals, and large caps. The American hegemony is stronger than ever, especially considering how foreign currencies, and BRIC have lagged the S&P considerably. American Express, Tesla, & Google are on fire. Great time to be long. From coast to coast; from Silicon Valley to Manhattan mind blowing wealth is being created. Tumblr sold for $1.1 billion. DJIA up 250 points this morning like it's nothing. Home prices going gangbusters again, but not a bubble this time around. Smart cars and smart phones everywhere. A digitally connected, hyper-capitalistic, consumerist society. The creative class is running circles around the pessimists who are still stuck in a 2008/2009 mindset. The world has long since moved on. No one cares about stuff like debt, Europe's recession and job loss anymore. When will the fed reign in the money supply? Does it matter? No it doesn't. Stocks surged in 2004-2007 even as Greenspan raised rates over four basis points. Smartism, spendism, globalism, and richism, is here to stay.

The system may occasionally suck, but it works. Things do get better, and those who hold can reap substantial rewards. There is no problem that can't be easily remedied by super efficacious policy in congress and global central bank coordination. Congress deserved a round of applause for saving the financial system in 2008 and not impeding in the subsequent economic & stock market boom with excess regulation and activism. Bernanke deserves a Nobel Price for defying all the critics and enacting what may be the most success monetary policy in the history of the United States, even more so than the overrated liberal hero Paul Volcker who caused the market to crash by unnecessarily raising interest rates, which would have corrected itself on its own. Liberals continue to whine about job loss and record high inequality, & profit margins, and student loans being unsustainable and detrimental to the economy. Four years later, they are still wrong. The debt binge is still sustainable. Wealth inequality should be celebrated, not reviled. Student loan debt at record high is not crisis waiting to happen. 99.9% of the time what the liberals call a crisis or a bubble turns out to be a permanent trend shaped by underlying fundamentals. If congress is getting low approval marks it means they are doing a good job by making the necessary but unpopular decisions that benefit the most important people of society and the economy, instead of caving into the liberals that want the see the economy fail and wealth to be spread, wasted or destroyed. The majority of the American people-especially the left- are oblivious to to how the the economy works. We don't need to regulate derivatives, compensation and leverage. If a too big to fail company fails it's easy to bail it out with near 0% yeilding debt, so the free market can continue with minimal interruption.

5/22/2013 Get on Board the Wealth Train

Dow 15500

This market has rallied so much I can't even keep up with it anymore. Everyday the dow effortlessly rises 50-150 points and yet that PE ratio just won't budge. You can have the DJIA at 20,000 and only then will valuations be above average, and that is assuming there is no earnings growth. How much higher? We haven't even begun the accent of interest rate cycle yet. Once that peaks at around 5-6% the dow may be at 100-200k. I would not be surprised to see 10-15% annual returns for the next few decades.

But this it agrees with my predictions from 2011 about a huge, perpetual bull market based on a new economic system called dyseconomics. An economic system that benefits the most productive of society is the one that is optimal for growth. Why is there such apathy from congress to create jobs? Because the unemployed have been written off as losers and are now used as pawns to advance pro-growth policy. Of course, we hear alot of rhetoric about the need for more competitiveness, less regulation and lower taxes but even I will concede none of those things will make much of a dent in the labor situation. It was never intended to. Same for Bernanke's talk about unemployment; everyone knows he doesn't care about the unemployed that much, but it makes for a good excuse to keep the foot on the monetary pedal forever. The useless media and blogs create these narratives about how X (obamacare/sequestor/fiscal cliff) will hurt Y (healthcare /defense/stocks) and lo and behold, defense and healthcare are the best performing sectors of a market that is up 20% YTD. There's no end in sight for fed intervention, free market capitalism, foodstamps, and globalization. You can have broad asset class inflation of real estate, oil prices, treasury bonds, municipal bonds, and junk bonds. We need more student loan debt. Need more buy all dips and consumer spending. Google $2000 soon. LNKD $220, AMZN $500, PCLN $1000, TSLA $500, FB $40, NFLX $500. For the DJIA, just multiply every component (except AA and AT&T) by 2-4 to get its short term future value. So DIS at $60 is $120-240 within a 2-5 years.

Will Google suffer the market cap curse that befell AAPL and CSCO? No way. The downfall of Apple coincided with the market cap exploding; the two are independent events. Had Steve Jobs not died AAPL would still have the same problems as it does now; nothing would have changed. Google is in vastly superior position than Apple in terms of growth, market share dominance, profit margins, and Wall St. enthusiasm. There's no reason to expect any of this will change when it becomes a 1/2 trillion dollar company. Google $1 trillion by 2017?

Get on board the wealth train. People getting richer than ever with almost no work. Just today someone made a high five figure paper profit on some DIA calls. A 9-5 chump would have to work a year to make that much money. A college student saddled in debt has an illustrious future blaming republicans and Bernanke on message boards and blogs about the very debt he self-inflected himself with. Losers remain losers. Winners buy the dips. They own stocks. They buy real estate in nice areas such as where I live. It's funny reading articles on the NYT about student loan debt and internally playing a laugh track. Going on blogs and reading about the fed creating bubbles and laughing out loud. These liberals were calling it a bubble as far back as 2009. They are still waiting for the next flash crash. Or for the fed to begin tightening. None of those things will happen. lol

5/21/2013 The Perpetual Bull Market Rages On

Dow 15400

This market keeps going up. Nothing short of divine intervention can stop it; for god himself to extend his hand and push it lower. We've become a nation of crybabies seeking wealth redistribution and crisis. Since 2009, liberals predicted a bursting of the alleged student loan bubble, profit margin contraction, double dip recession, bear market, a 'lessening' of America's foreign policy and economic influence, fiscal frugality and consumer de-leveraging. All of these were wrong. We want to blame the 1% and the fed for being oblivious to hidden risks, when they are non existent or very easy to remedy by printing money. The market has rallied 35% in just a 3 year period; it would take a one-in-a-decade type crisis too erase those gains. Just being long an index like DIA or SPY will make you more money with less anxiety than waiting for the black swan that will never arrive, especially after factoring in very generous dividends.

Is the growing welfare state compatible with a booming economy and stock market? Since 2011, I have argued emphatically 'yes'. Despite this huge bull market and earnings boom for the majority of the population there's no perceivable economic improvement whatever since 2009. You can take the headlines from 2008 & 2009 about debt, student loan bubble, main-street falling between the cracks, reckless financial risk taking, food stamps, entitlement spending and put them on today's paper and they would be indistinguishable to most people. But ironically, this is good for the economy. We don't want the less important people to reap too much, if any, of the economic windfall. Look at the headlines in 2008 & 09: debt and TARP; now: debt ceiling; then: too big to fail; now: too big to fail + Jamie Dimon; then bad economy; now: same thing.

Having a lot of people on govt. programs is a social problem, but not necessarily an economic one provided there are enough productive people to compensate, and the USA maintains is reserve currency status. The rapidly widening wealth gap ironically helps support these govt. recipients because the wealthy consume and pay taxes at a disproportionaly high level. Taking the integral, the cynical conclusion is that the total consumption of the highest earning individuals, the BRIC middle class, & corporations is enough to offset the economic drain of a growing population of unproductive individuals.

Record number of people on foodstamp and disability rolls. However, the economy is thriving in terms of S&P 500 profits & earnings, exports, consumer spending, and stock market returns, so it would seem as if the problem isn't as bad as the salt water Keynesians such as Krugman and Reich want to believe it is. The Keynesians insist that long term unemployment poses an economic risk, but there is no actual empirical evidence to support this claim. If if were true it would be reflected in the earnings data, which it isn't.

The cacophony over Jason Richwine and IQ is evidence that we're in the smartist era. IQ is a very touchy subject, and will continue to be so as intellectual ability gains preeminence in today's increasingly technological and productivity driven society. As for what particular abilities IQ is supposed to measure, or the predictive value of the score itself on future academic or career success is subject to debate. For example, to enlist in the military you need to score in the top 31 percentile on AFQT (essentially an IQ test), yet 66% of Hispanic high school graduates are unable to do so. So apparently a lot of people are still smart enough to complete high school yet too dull to join the military. So is the test accurately measuring what it's supposed to? And even if the test does measure a skill accurately, is this indicative of real world performance?

We don't actually know the genes responsible for IQ, but it's safe to assume there is a combination of genetic and environmental factors that determine one's IQ. Despite the wishful thinking by IQ denialists such as Gladwell, I would estimate the former plays a bigger role than the later. Evidence of this is that the macroscopic appearance of the brain of higher IQ individuals is actually different than that of average or dull people, which cannot be readily accounted for by nurture. Or that identical twins separated have similar IQs, despite different environments. The good news is IQ isn't completely hereditary, or we could theoretically have an idiocy type scenario.

5/18/2013 Why You Should Buy Stocks

Dow 15330

The DJIA is up a staggering 2500 points in just the past three months alone, and 5000 points since October 2011. It's completely rational when you consider that the economy is booming and valuations are low.

While the 90's are often viewed nostalgically as some sort of economic utopia, few would beleive that the DJIA has gained as many points between March 2009 to present as between 1995 and 2000, and yet that is exactly what has happened, but equally amazing is the absence inflation or high valuations normally associated with such exceptional returns. The present macroeconomic enviroment is more condusive for stock market gains than any period in the 90's or 80's. In April 2000, for example, interest rates peaked at 6.5%; they are still at 0% even after a 150% rally from the 2009 lows. PE ratio are still very low with the S&P 500 clocking in at just 14. You have the constant backdrop of fed intervention, low regulation, buybacks, mergers, globalization and the booming BRIC middle class. America's own lower & middle class is in an intractable rut, with the highest of income earners -the greatest beneficiaries of this economic & stock market boom - running victory laps around the middle class whom are mostly spectators. Unemployment, unaffordable healthcare, and Facebook are the new American pasttimes.

This is the only the beginning of what historians will deem greatest era of prosperity in the history of human civilization. A person who bought Tesla stock last week would have doubled his money; someone who bought options would have increased it by 100 fold. Google stock has increased a staggering 800% from its IPO closing price just nine years ago. The new era is here. A world awash with liquidity and the promise of infinity prosperity for some and little for most. The world world went from being positively curved (spherical), to Euclidean (Thomas Friedman's flat world), and is now hyperbolic. An era of globalization, capitalism, disruption, and wealth creation in overdrive. I, for one, welcome our information overlords.

A large uptick of jobless benefits yesterday is a bullish development because it increases the odds of more QE. The dollar is stable and yeilds are histrocially low because even as the market booms people still want to park money in cash, -a testiment to America's exceptionalism in an otherwise uncertain world. The BRIC indexes, for example, have lagged the S&P 500 by 20-30% since May 2011. Google $1000 soon. An economic boom that benefits the few is the best one of all because it means the creative class gets richer without the inflation/bust cycle typically associated with rapid asset class appreciation. We can have only booms and no busts. The fed is still fixated on unemployment and unimportant data like that; however, the myopic market does't care about job loss, weak manufacturing, durable goods, etc. If profits & earnings keep surging and valuations remain low, stocks will keep going up. It's really that simple. Just ignore the economic data and buy stocks.

James Altucher keeps giving bad advice to quit your job. Keep your job and use the money to buy stocks. Live parsimoniously and put at much of your income and home equity as possible into an index fund such as the DJIA or SPY. The only exception to this rule is if you live an area where home prices are perpetually rising such as the Bay Area, Manhattan, Aspen, Long Beach etc. In ten years with a small investment you'll be a multi-millionaire as the dow crosses 100,000. Or you can take Mr. Altucher's advice and quit your job, squander all your assets on a failed business, and live on foodstamps for the rest of your life because no company will want to re-hire you and your credit score will be in the toilet. The Creators have engineered the system where only they succeed. They seek absolute power, and within 500 years will attain it. But the stock market is one of the few way average individuals can piggyback off the success of the elite, with negligible risk and effort. You owe it to yourself and your family to secure you financial future and be among the enlightened.

5/14/2013 The Daily View: QE, Immigration, HFT, Obama

Dow 15130

As predicted last week, the speculation about Bernanke ending QE by some peon from the WSJ proved to be a dud. Stocks are surging. The buck stops at Bernnake, not the WSJ or dissenters. It's so funny how these premonitions turn out to keep being false, much to the disappointment of the left who oh so badly wish that prices would fall, but refuse to. I am always right.

We need more productivity, cheaper labor and consumer spending- not overpaid and redundant jobs. Various factions of the left are opposed to immigration reform because they they want all the unskilled jobs and social benefits to themselves. With regards to IQ, liberals and protectionists typically have a lower IQ than most immigrants, which is why they are unable to find work and spend most of their time whining on message boards about the debt, Bernanke, and inequality while collecting govt. benefits. Immigrants, on the other hand, are too busy trying to make a positive contribution to the economy to complain all the time. Immigrants have a greater propensity to consume than liberals and protectionists.

We can debate the merits of more spending versus austerity, but it's pretty obvious which side has had the underhand over the past half century. Easy money rules the day, but no hyperinflation as so many pundits such as mark Faber, Peter Schiff, and Nicholas Taleb wrongly predicted would happen in 2008/2009. Google stock will keep going up. Paul Krugman is right about the debt not being inflationary, but overstates the virtues of Keynesian economics. The monetarists seem to be the only ones whose policy as per empirical evidence is a success. The other sides base their aguments on wishful thinking about how Keynesian economics [I]should[/I] create more jobs or how printing money [I]should [/I] cause hyperinflation. Bernanke is still the hero of this economic and stock market boom. Obama taking credit for Bernanke, Bush and Paulson saving the economy. he's trying to spread the wealth and undo the progress of the last administration.

Various media outlets and blogs are spreading misinformation about high frequency trading (HFT) perhaps to scare people out of the stock market and for ratings. HFT doesn't pose a threat because over the longer run (months & years) stocks will still rise to their fair value and because HFT works both way; either buys or sells can be traded with high frequency, not just sells. Having lots of high frequency traders smooths out inefficiencies in the market making the process more democratic for average investors and the extra volume helps keep the bid/ask spread narrow. If you buy 1000 shares of a stock with a 50 cent spread you've already lost $500 if you try to sell. Computerized trading hasn't made stocks more susceptible to crashing. For example, stocks suffered high drawdowns in various panics in the 1800's and 1900's.

The growing sentiment is that Obama hasn't accomplished anything meaningful during his presidency and is unlikely to do anything for his remaining years. He's been riding off the coattails of Bush in terms of this stock market and economic boom and the war on terror success. Bernanke, Paulson, and Bush laid the groudnwork for the 4+ year long stock market rally through TARP and QE. Most Business leaders know that Obama didn't save the economy. Meanwhile, the stimulus and Obamacare failed. History will look fondly on Bush for making the necessary unpopular sacrifices to secure the nation's economic and homeland security, that six years later continues to pay dividends. The Bush tax cuts, bank bailouts, QE, war on terror, and free trade have solidified the United State's position as the uncontested economic and military global superpower. When Europe dithered in its own financial crisis, we wasted no time infusing liqudity. Our central bank was the first to aggressively cut rates.

When liberals' predictions fail to come to fruition rather than conceding that they were wrong they change the goalposts and or extend the time frame. So global warming becomes climate change. An impending recession is delayed another 2 years. The 'peak' of peak oil is shifted to the right, etc. Or keep taking derivatives until you get the negative data you seek. A college tuition bubble bursting originally predicated upon falling tuition prices now redefined to be merely 'lower ROI' on a college degree or a decrease in the rate of increase or a negative second derivative. To the libs everything is either a bubble or unsustainable.

The background has been changed to depict the invasion by The Creators. Hundreds of years into the future in the age of zero, the population of the USA will have swelled to over a billion people and there is mass unrest and destitude that the bloated, innefective government is unable to fix. Beginning with seamingly benign space tourism and asteroid mining programs in the 21st century, the ambitions of The Creators has spiraled out of control to include space colonies and warships parked in the asteroid belt. In the intervening years, global nuclear disarmament is achived- originally lauded as a milestone for world peace - later proves to have grave ramifications as most nations are rendered defenseless from the upcoming invasion. To stem the social unrest, the exasperated US government ratifies a deal with The Creators to bring about order in exchange for The Creators having unfettered reign of space as a sovereign entity. The Creators, originally planning to launch such an invasion, sieze this opportunity. Warships descend upon major metropolitan areas and the situation quickly spirals out of control as mechs, marines and batteships open fire, causing substancial damage and casulaties. Nations and indidivuals-disarmed due to budget cuts and peace treaties- are unable to defned themselves.

5/8/2013 A Nobel for Bernanke?

Dow 15100

Should Bernanke get the Nobel Prize? If Obama can get one before lifting a finger, Bernanke at least deserves it for saving the economy with TARP and QE. Stocks always go up, thanks no less to Bernanke- the humble hero of this economic & stock market boom. QE policy is keeping rates low, making it effortless for multinationals to repurchase shares and issue debt and in the process levitating stock prices. What has Obama done? A failed stimulus and Obamacare that the majority of businesses and economists deem a failure. Whether it's stocks, real estate, web 2.0/big data, cloud computing, or social media never before in the history of modern civilization has it been easier to become wealthy in a very short period of time and with little effort. More millionares & billionaires were created in the past four years than in any four year period in history, including the final years of the 1982-2000 boom. With no equivocation, Bernanke can rightfully take credit for this boom. Wall St. knows he saved the economy. Same for congress and business and technology leaders such as Warren Buffett, Bill Gates, Mark Andreesen, and Mark Zuckerberg.

We have 80's amd 90's era gains with the lowest valuations in years. The S&P 500 STILL has a PE ratio of 14, even after a 30% rally. Interest rates..those are never going up again. Oh, and exports & consumer spending blowout. Huge buybacks, M&A, and exports. DJIA Up 400 pts in just five days. 16000 soon. S&p 1700 soon. There's no excuse to not get rich in this market. Looking back, crashes are very rare and are often precipitated by either a crisis, rising interest rates or high valuations. None of those are in the purview. Index fund holders should have little to lose sleep over.

We're still in the smartist era. Those who can't keep up will be brushed under the rug or wedged between the cracks. The economy doesn't need them. The Keynesians are wrong that long term unenployment poses a risk to the economy; the actual empirical evidence (such as earnings reports) suggests it doesn't. The world is engineered by the Creative Class gatekeepers so you fail, so the only way to rise above it and secure your future is to buy stocks or get a high paying job. For many the later is not an option due to a lack of skills and connections, so that's why for years I been telling people to ignore the doom and gloomers and jump feet first into the market. In astronomy infrared radiation is used to detect stars that are otherwise invisible. The radiation gives them away. A perpetually rising stock market is evidence that The Creators are succeeding. Just as you can't aproach the star, you know it exists. Same for the stock market- you can't join the creative class, but you can profit off it.

To demonstrate the bifurcated call option pricing formula, let's consider a hypothetical stock that over 120 days (6 months) risen from 40 to 50 and then there is a sell-off for the next five days where it falls to 44. (a total of 125 trading days) On either the LHS or RHS, The daily volume is 10^6 and the average order size is 10^3. Calculate the call option with a strike of 44 twenty days (1 month) until expiration. We're compare the results of using the normal chart to scalar option pricing formula with the bifurcated version. We will see that the bifurcated call option formula correctly accounts for the observed increase in implied volatility during sudden sell-offs, and hence more expensive option prices.

The assumption is that the stock once rebounding to 50 will resume it's original trend, but until that happens there is increased implied volatility.

q2=120*10^6/10 = 12000000 (this is the long standing trend)

q1=5*10^6/6 = 833319 (the new trend)


a2= 1.03

a1= 4.04

The segment divider is 50, hence we compute p=


New PDF:

Pricing the 44 call

C=1.52 (the truncation factor is very small and can be ignored)

If we use the singular option pricing formula with a2 we get C=.40. this is too cheap.

On the other hand, only using a1 gives C=1.60 . As time until expiration increases, we find that p falls until the longer run q2 overtakes q1 and we have option prices resembling those of our old call pricing formula.

5/7/2013 The Dyseconomics Endgame?

I keep being right because I know how stocks and the economy works. We're still living in the age of zero- an era of few opportunities for most people, crumbling infrastructure, overtaxed public resources, and the deracination of the middle class. The continuous headlines of stocks making new highs reinforces the dichotomy of the creative class who benefit the most, and everyone else. This un-participatory economic system is one that is optimal for growth. That's just the way it is. I don't make the rules, I only blog about them.

Some readers have asked; what is the endgame of dyseconomics? A crash? Another financial crisis? I predict neither, but instead a gradual continuation of the global macro and political trends we've become accustomed to over the past four years. That means a perpetually rising stock market, continuing decline in labor force participation, record high earnings & profit margins, massive consumer spending, etc. A mellifluous combination of globalization, the rapid development of technologies, the booming BRIC middle class, and fiscal policy has protracted the boom period of economic cycles, until cycles cease to exist altogether.

In 2009 & 2011 I predicted that we are in the biggest economic & stock market boom in the history of human civilization that will culminate in the total accretion of power by the Creators of The New Era and the reorganization of a new society that will probably bear little resemblance to the world we live today. The time frame for this phase transition somewhere in the range of 100's of years into the future. This is like the plot of a science fiction novel unfolding in real life.

The 1% will always win and there is nothing anyone can do about it. Policy is specifically engineered to make us richer. Congress dithering is good for the economy because too much regulation will stifle growth. It's better to have an economic boom the benefits the most important people of all such as The Creators of The New Era than have too many unimportant people participate, resulting in inflation and premature interest rate hikes. Submission to your information overloads will be by servitude. Those who are unable to make meaningful contributions in The New Era, as deemed by a jury of Creators will become second class citizens, and eventually purged all together. This is already happening as evidenced by the splintering of America into a creative class elite and everyone else. The grey goo isn't from out of control nanotechnology replication As quoted by Thomas Friedman, the world is flat and those unable to keep up are being pushed over the edge. Liberals are trying to place safety nets over these ledges, but there's so many people and the nets can't handle the stresses.

If you want to believe the economy is weak because some liberal told you so, then go ahead and keep your head in the sand. People like me are buying the dip and joining the new rich society. Robert Reich, the neanderthal turned economist, wants to believe that more jobs will lead to growth even though stock prices and profits have risen 130% from the March 2009 lows as labor force participation is at historic lows.

Economist or Neanderthal? Maybe the neanderthals went extinct because they were all economists!

Or the bombastic Nicolas Nassim Taleb that can't take a joke, let alone valid criticism. The best efforts by the liberals to spread misinformation about the debt being unsustainable, profit margins being too high, or labor market too weak have failed to put a debt in this ineradicable bull market. They want to believe in crisis and recession. They reach for black swans, only to come up empty handed every time.

5/7/2013 No, James Altucher, Stocks Are Not For Suckers

James Altucher last week wrote a post calling stocks a suckers game. It's too bad he would sully his otherwise pristine track record as one of the few correct stock market & economic prognosticators since 2009 (me being another) with liberalism and penny stocks. Supply and demand is a very superficial way of looking at the stock market. There's much more than that in play- including energy densities, sentiment, sideline cash, profits and earnings etc. In addition to the bullish backdrop of buybacks and mergers, there's trillions of dollars in cash and bonds that can still be rotated into stocks.

James makes the mistake of confusing macro economics with sociology.

He writes:

Nobody feels like the stock market is back. Or that housing is starting to creep up. Or that America is starting to insource manufacturing again because globalization has crept up prices worldwide. People look at their crappy jobs and salaries and say, "I don't feel so good". And so they get a scarcity mentality and don't want to buy shares.

Actually, Wall St. does better when mainstreet is downtrodden and worse when jubilant, as we saw in 2000 with tech stocks or 2006 with housing when too many ordinary people were feeling rich. Mainstreet's pain is Wall St.'s gain. It's irrelevant to Wall St. that people are falling between the cracks. On the totem pole of priorities, it's subterranean. At the top is fed policy, consumer spending, productivity, and exports. Near the bottom is housing, regional surveys, consumer confidence, and manufacturing. Who will buy stock if mainstreet doesn't? Hedgeunds, foreigners, and institutions will. The result will be less trading volume, but prices will still rise to thier fundamental fair value.

Later he lists some penny stocks as alternative to index funds. This is a really bad strategy for making money in the stock market. Because the companies usually have moribund fundamentals and are easily manipulated, they tend to underperform the market and carry a high risk of sudden implosion. His economic and market analysis is usually correct, but I would stay away from any of the stocks he recommends.

5/7/2013 Bifurcated Option Pricing formula

The bifurcated option pricing formula has two variance variables- one for each segment of the LHS support triangle (puts) or resistance triangle (calls).

Define the differentials that describe the LHS triangle:

We can express these differentials in terms of time

The two variability components:

Constructing a new PDF

Call option pricing formula

p is the probability of the stock closing below the segment. (1-p) is the probability of it closing above the segment.

Because stock prices cannot attain negative values the truncation factor makes sure that the distribution has a total area of one.

This option pricing formula agrees with real-life observations such as how implied volatility tends to increase when a sudden selloff interrupts a long-standing trend.

4/30/2013 The Daily View: Exit Strategy, Failure of Keynesian Economics, El-Erian, Meredith Whitney, and Nassim Taleb

Dow 14840. This market is nuts and yet completely rational. S&P 500 at historic highs. Feels like the 90's again but with consumer discretionary stocks the new dotcoms and much better economic fundamentals.

No exit strategy? No problem.

Bernanke doesn't need an exit strategy and there isn't going to be one. As I predicted since 2011, treasuries & stocks will rally together with the S&P 500 and TLT both posting 30% gains since 2011. The financial media is keeps getting this wrong by making the implication that a 'risky' asset class (commodities, stocks, real estate) has to have an inverse relation to a less risky one (bonds or munis). The actual empirical evidence handily debunks the 'great rotation '. Massive surpluses from BRIC countries, government & private institutions, individuals, and the fed's buyback program are inflating all asset classes. Those bubble metaphors are wrong because the fundamentals of the US economy are better than ever. PE ratio of the S&P 500 still just 13. Profits & earnings at historic highs. Consumers in the US and overseas in a spending frenzy. While liberals whine about crisis, inequality, and debt, you got foreigners snapping up billions of dollars US and Canadian real estate. The consumer discretionary spider is slapping the liberals across the face by making new highs every week.

Last week I explained how Krugman wants to waste money on useless job programs and social safety nets. According to a consortium of economists, the Obama stimulus was more or less a failure and did much less to help the economy than TARP. Keynesian economics: wasting money in the futile and deleterious pursuit of 'full employment' . Austrian economics: intentionally starving the beast while treasury yields are at historic lows, so the economy enters a recession. Or the third way: dyseconomcis where you spend $ on pro-growth programs such as homeland security, defense, tax cuts, tax breaks while allowing the fed to keep its independence except in exigent situations where the fed and Washington have to work together devise a plan, such as in 2008 with the immensely successful TARP program.

On Facebook, Taleb writes

" I select him to start as he worked with central banks, the perfect profile of the person supported by the taxpayer against the taxpayer's own interests. "

Mr. Taleb is so deluded and partisan that he wants to believe that Bernanke failed when the stock market is surging and the consensus is that TARP was a resounded success. By opposing bailouts and the fed, he's allegedly 'protecting taxpayers'. Anyone with real skin in the game (in contrast to a welfare recipient) can attest to the efficacy and necessity of the bailouts and the fed. Tax payers, many whom own stocks and real estate, are thankful for the fed and Washington for doing such a great job in 2008. Tax payers have already earned back their money (and much more) in the form of this huge bull market and real estate boom, and income taxes for 99% of Americans have not increased ONE penny since 2008 (despite all the huge spending), so it's as if the bailouts were free. Oh and treasury yields still at historic lows. The tiny increase in taxes was not borne out of economic necessity, but liberals being unwilling to comprise. It's disingenuous for Taleb to purport to be looking out for tax payers when he advocates policy that will make the economy worse off and the nation poorer.

Niclas Talleb is the ultimate purveyor of augmentative fallacies. He reduces his opposition to strawmen and tries to obfuscate his augments in mathematical gibberish, or Post hoc ergo propter hoc to advocate regulation. " If low interest rates, big banks, and low regulation preceded the market crash in 2008, it must have caused it." Or that statisticians & economists are too incompetent and myopic to see the limitation of their models, while opposite is true; people learn concepts to understand their limitations. For example, we know that the speed of light cannot exceed a certain value, hence by learning physics we learn its limitations. He could have just stated in a few sentences how Karl Whelan is wrong, but refers to his long rambling math PDFs , assuming selfishly that the rest of the word has as much time on their hands as he does to dissect his mathematical proof about how rich people are oblivious to risk. We rich people don't need his lecturing about risk.

US home prices have risen at fastest pace in seven years and the S&P 500 closed at a historical highs. The crybabies waiting for the housing market to deflate, a black swan, a spring swoon, or the fed to raise rates will continue to be disappointed. The world is awash in liquidity and as mentioned earlier and foreigners are snapping up properties as soon as they hit the market. It comes as little surprise the protectionist and isolationist cons and libs, in their ideologically motivated war against prosperity, wealth creation, and free market capitalism, want to cutoff this conduit of economic growth with regulation and prematurely raising rates.

El-Erian: Economy Unfortunately Stuck at 'New Normal'

The U.S. is likely going to continue to depend on the Fed as opposed to having a handoff to genuine growth, says Mohamed El-Erian, CEO and co-chief investment officer at PIMCO.

Why does anyone still care what El-Erian (aka Jar-Jar Binks) thinks? He's been wrong about everything since 2009. The liberals that predicted in 2008 & 2009 a permanent downshift of the american economic & foreign policy hegemony and a new era of frugality and fiscal restraint were resolutely wrong. S&P 500 profits & earnings have doubled since 2009, which debunks the new normal hypothesis. The job market will suck forever, but this isn't sign of economic weakness as shown by earnings, exports, consumer spending, and roaring stock market. We need more productivity, more exports, more consumer spending, more technology & deregulation - NOT useless job creation programs. High unemployment and downward economic mobility is compatible with a thriving consumerist economy and a perpetual bull market. The debt binge is still sustainable and the Great Bernanke & Bush bull market shows no signs of slowing.

Meredith Whitney is another liberal that has for years predicted a downturn of the municipal bond market, and continues to attract media attention by riding on the coattails of her one and only correct prediction in 2007. Like other liberals doom and gloomers, by underestimating the 2009-present economic and liquidity boom, all subsequent predictions have been completely wrong. Municipal bonds will continue to surge with no end in sight.

4/25/2013 The Daily View: Spending Vs. Austerity, Revising Correct Predictions

Dow 14750

Rogoff and Carmen Reinhart (debt reduction) versus Krugman (more spending) who is right? Both are right and wrong to varying degrees. Krugman is right about the debt binge being sustainable due to historically low bond yields and that America isn't Greece, but wrong about spending on useless job creation programs and social safety nets. He's also wrong about high unemployment being detrimental to the economy or a national 'crisis'. The proponents of austerity are right about the need to cut welfare and taxes, but wrong about the sustainability of spending, the dollar, and the fed.

In previous posts I've given fundamental reasons why stocks always go up and why they have such a strong tendency to always rebound so quickly from sell-offs. Last week the market fell and now all the losses have been recovered and we still an entire day left of trading. Let's recap: interest rates are never going up again, everything keep being better than expected, productivity, massive exports, tons of consumer spending, huge buybacks & dividends, and a stubbornly low PE ratio.

Since the creation of Stockcreeper in May 2011 I have been right about everything, including: the sequester & fiscal cliff being a non-issue, no repeat of the 1994 bond crash, pain at the pump would not hurt the economy, that treasuries & stocks could rally together, muni bonds were a buy, and to buy every dip.

I was also right about selling Apple and buying LNKD, AMZN, Facebook, and Google. Other correct predictions: a decline in the personal savings rate, consumer & small business confidence being unimportant, an increase in consumer credit, no bear market, no double dip, Peter Schiff being an idiot, liberals failing on gun control, no profit margin contraction...

I proudly display thumbs downs and down-votes as badges of honor for doing an effective job getting the message across, even if many don't agree with it.

The creative class is still getting richer than ever through the creation of new technologies and speculation. These financial instruments do create economic value even if they occasionally fail or we don't fully understand them. The left wants regulation, 'ending the fed', raising interest rates, and recession to punish the rich. They want to fan the flames of crisis to push a wealth-spreading agenda, just like they did in 2008. Through the major media outlets such as the New York Times and TheAmericanConservative they spread lies about either the debt being too high -or- unemployment being a national crisis that only more stimulus can ameliorate.

For the remainder of the decade we're going to have more debt and anemic job creation. Congress is innefective by design, but that's good because the free market does a better job than the government at creating growth. The national anxiety and frustration over the economy and Washington is paradoxically good for stocks. When everyone is too optimistic you tend to get high interest rates and bear markets.

4/24/2013 Why Stocks Always Go Up

For the 4th consecutive trading day stocks keep going up. Nothing short of divine intervention can stop this bull market. But people ask 'why are stocks going up if the economy is weak' or 'if unemployment is so high and or if the middle class dissolves, who is going to buy the goods?' These are easy question to answer.

1. stocks are perpetually rising because of a combination of blowout profits & earnings, massive gains in exports, productivity, globalization, financial & technological innovation, and free market capitalism. Things like job creation, small business confidence, or durable goods is irrelevant to the health of this bull market or economic boom. Hence the apathy by congress to do anything about it. Job loss is good for profits, good for twitter, netflix and facebook. Congress is doing a good job by doing as little as possible. Let's let the free market regulate itself instead of imposing unnecessary regulation of wasting money on noneffective job creation programs. At the same time, Bernanke should be showered with accolades for engineering this huge turnaround through his brilliant monetary policy. He, not Obama, deserves credit for the mull market and economic boom.

2. But what about consumption? Who's gonna buy the stuff if the middle class goes away? Consumption keeps rising due to globalization, increasing concentration of wealth in the highest income strata, growth in business to business based commerce, and increased consumer debt. S&P 500 companies derive 50% of sales from overseas. Billions of people in BRIC countries are entering the middle class. Ignoring the whining by the liberals about inequality, the actual data shows that consumer spending has not abated. For example, despite recent tax hikes, consumer spending remained strong in the U.S., as American Express reported a 5% increase in revenues and 8% increase in pretax income. The global network and merchant service division, which has agreements with third party financial institutions to issue American Express branded cards reported a 4% year-on-year increase in revenues and an 8% increase in pretax income.

Or from

The Commerce Department said on Friday consumer spending increased 0.7 percent last month after an upwardly revised 0.4 percent rise in January. Spending had previously been estimated to have increased 0.2 percent in January.

The liberals want de-leveraging and frugality, yet it refuses to happen and we should be thankful for that. We may live in a participatory democracy, but not a participary economy. The creative class continues to thrive because they contribute the most in terms of consumption, innovation, and job creation. Why should the least productive of society deserve the same fruits of economic progress as the creators? It doesn't make sense.

B2B companies such as Salesforce, Google, IBM, Cisco, and Oracle are still reporting double digit growth.No recession there.

Bitcoin going to $400 soon. Load up. Merchants will continue to adopt bitcoin as an alternative to free and charge-back laden credit cards. Customers like bitcoin because it's anonymous and convenient.

4/23/2013 We can't prevent crashes, but thankfully they are brief

In chart to scalar, crashes occur when high-density selling on the RHS overwhelms a lower density LHS. If a stock is trading flat and you throw a bunch of extra sell orders, the price will need to fall to satisfy the new equilibrium equation and buy order equation. The variational equation when constrained by the equilibrium equation produces the characteristic parabolic shape of the crash. The buy order equation predicts how much it will fall. An example is given here

Chart to scalar says that small crashes are hard to prevent because a relatively small amount of volume is needed on the RHS in relation of the LRS support volume for the stock to abruptly fall. Fortunately, due to the symmetry properties an equally small amount of volume is needed for the stock to recover, producing characteristic 'v' shaped bottoms as seen in the examples below.

from zerohedge: In the bottom picture the equilibrium equation is satisfied.

This can be extended as a statistical problem by finding the probability of a sufficient number of random buy & sell orders clumping to cause the market to crash and is the motivation for option pricing formulas.

4/23/2013 Stocks Surge for a 3rd Day

As usual, no one on Wall St. cares about China data, supposedly 'weak' earnings, housing data, consumer confidence and stuff like that. The libeal media is looking for any excuse for stocks to go lower and they keep being wrong as the market surges for a third day in a row. Exports, consumer spending, large cap growth is still better than expected. 'Weak' earnings need to be put in context. When a company like caterpillar reports bad earnigns, what it really means is that earnigns are less good than expected, in contrast to being moribund. Home prices keep going up where I live, too.

The equipment maker lowered its full year revenue outlook to $57 billion to $61 billion. Profit is now expected at $7 per share. In December, Caterpillar said it expected full-year profit of $7 to $9 per share and revenue of $60 billion to $68 billion.

The difference between $1.39 a share vs. $1.31 or $57 billion vs. $61 is trivial and can be caused by one of many possible business factors, but the media jumps to the conslusion of blaming the economy. Wall St. is laughing at the liberal media's premature and always wrong proclamations of economic weakness. Stocks always go up, speculators & dip buyers keep geting richer and richer. Libs seeking black swans and fiscal restraint & frugality keep being disappointed. The future of America is much like it is today, but to the extreme. Extreme profits & earnings, extreme wealth inequality, extreme tuition, extremely high stock market, extremely high unemployment, extreme export growth, extremely high gas prices, extremely high traffic on facebook etc. There will be no economic downshift or marginalization of America's international influence as so many were predicting in 2008.

We've become a nation of crybabies seeking crisis, higher wages, social saftey nets, gun control, and more work hours. How about fewer hours and less pay? Job loss is a necessary side effect of an economy running optimally. That means more time for facebook, netflix, and google. The end of work is here and I embrace it. From you need to Quit your job. Agree. Time to quit and get on twitter and tweet about it. Upload pictures on facebook. That way you're contributing to the economy in a more efficacious manner than being overpaid for a job that should be outsourced or automated.

That's just the truth, and there's no way around it. We're becoming a jobless and cashless scoiety with an accelerating chasm between the haves and have-nots.

Interest rates still never going up ever again. According to the bond market we don't need fiscal frugality, but in contrast to Krugman we shouldn't waste money on useless job creation or welfare programs.

I want to believe the free market is the best path to prosperity. I want more search and seizure. More wiretap. I want more stocks going up.

The moonbat Nicholas Nassim Taleb hasn't written anything precient since 2007 when a single passage from his book, The Black Swan supposedly predicted the overblown media generated financial crisis. While there may have been a crisis in terms of bank failures, the liberal media helped fan the flames to get Obama elected. Also, it was contained within a few months due to an expedient, super effective bailout and there was little contagion to non-financial sectors. In contrast, the 2001 recession had a bear market that lasted a whopping 32 months, the longest bear market (as measured from peak to trough) since the great depression.

Mr. Talab is wrong about quants using Black Scholes or high frequency trading causing or exhaserbating the crisis; quants seldom use BS anymore and how would you explain the crash of 1987, 1873 or 1929 when high frequency trading or quants didn't exist? Some call it high frequency trading, I call it a bunch of people rushing to a narrow exit. In Nassim's world, rich, risk-oblivious people are the root of all of all problems in society and only he has the solution, which is is to inflict as much pain as possible on the economy and the most productive of society.

The critics of quantitative finance fail to appreciate that QF is a means, not an ends. Quants use formulas as a starting point because guessing the value of a derivative would be impractical versus a formula based on some unequivocal assumptions, especially when thousands of derivatives need to be priced. Imagine trying to price an IBM option 3 years into the future. how would you even know where to begin? Is it $5, 10, 200? This is a huge potential margin for error, so a formula will give a value that is at least reasonable and further adjustments can be made.

Chart to scalar changes the way we think of the stock market as being a non deterministic process of wiggles with drift (Brownian motion) to a more orderly physical system that obeys a set of rules. With lagrangian mechanics we know the trajectory of a thrown ball has a trajectory that follows a path a least action with the resulting shape being a quadratic. Do rules exist for stocks market? Yes. for example, a stock with a lot of trading volume will be unaffected by your small buy or sell order. A stock with thin volume will be. A large sell order or buy order can cause a sudden change in price in such that several days' or weeks worth of gains or losses can be erased in a single moment. With a set of rules based on empirical observation, one can try to construct a theory.

In chart to scalar ,we define the energy density as a triple product the geometric, volume, and price/slope component divided by the time interval. These variable are functions of p_2 on the RHS.

A higher energy density typically means cheaper options because the probability of the RHS penetrating the resistance barrier decreases.

Lastest Post 4/16/2013

Dow 14740. The stock market always goes up. The greatest bull market in human history is still going strong after four years with zero signs of slowing. Every dip keeps being bought. People getting richer than ever with real estate, speculation, web 2.0/social media, and buying the dips. In nominal terms, never before has so much wealth been created than in the past four years. Oh and treasury yeilds still falling despite RECORD highs for the major indicies. The treasury market goes into 'shock mode' on the smallest of bad news, but the market brushes it off. No repeat of the bond crash of 1994 as your perspicacious economic expert predicted many months ago. There will never be bear market ever again, or at least not for many decades. Daily volume will gradually fall as stocks rise, so the amount of money churning in the market will remain mostly unchanged and volatility will converge to zero as financial instruments become better calibrated to smooth out fluctuations. If you want to be a liberal pert, go ahead and keep waiting for the shoe to drop or the blackswan that will never arrive.

I am always right.

Moved all the old entries to the archive: Archive

Chart to scalar is pretty much complete, but there will be a second write-up on calibrating option pricing formulas around earnings announcements and other high volatility events using cubic curves and bimodal distributions.


Chart to scalar conceptualizes stock charts as simple graphs & shapes (lines, triangles, parabolas, ramps) that obey an equilibrium equation and a simple atomic structure of the interaction of buy & sell orders within the volume. These equations have numerous application such as modeling how stocks crash, the effect of insider buying & selling, market simulations, and pricing options.

For example, here is the chart to scalar call option pricing formula in a zero interest rate world

Unlike Black-Scholes (BS), the propagator of price chance in Chart to Scalar is the interaction of buy & sell orders given in the volume elements, instead of a drift process. BS ignores volume, but volume could account for the differences in implied volatilities between quoted option prices and BS generated prices.