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Heroes & Whores

September 20, 2018

HEROES & WHORES

“Certainly one of the most important things I learned is that numbers can be deceiving. There is a logic to mathematics, but there is also the underlying human element that must be considered. Numbers can’t lie, but the people who create those numbers can and do. As so many people have learned, forgetting to include human nature in an equation can be devastating.” ― Harry Markopolos, No One Would Listen

Image result for harry markopolos

The quote I used from Harry Markopolos’ No One Would Listen book about the Bernie Madoff ponzi scheme in my last article triggered a bittersweet recollection. For me, the experience captured the true nature of our warped financial markets, a culture  glorifying wealthy arrogant criminal assholes, while ignoring or ridiculing honest, hard working, highly intelligent truth tellers.

The picture of Markopolos above shows an average looking middle aged guy, with a five o’clock shadow, bad haircut, and wearing a modestly priced suit and tie. Since reading about his fruitless effort to expose Madoff’s Ponzi Scheme and his fifteen minutes of fame in 2009, I have felt an affinity towards him. We both have a brother and sister. We were both brought up in Catholic households and went to Catholic schools. We both have degrees in finance. We have both had financial careers. We are both married with three sons. And we both believe facts and an accurate assessment of the numbers always reveals the truth.

Through his job as a portfolio manager with a small investment firm Bernie Madoff’s investing record was brought to his attention. As a numbers guy, he immediately began assessing the returns.  Markopolos said he knew within five minutes Madoff’s numbers didn’t add up. It took him another four hours to mathematically prove that they could have only been obtained by fraud.

…click on the above link to read the rest of the article…

7.5 billion and counting: How many humans can the Earth support?

July 11, 2018

Humans are the most populous large mammal on Earth today, and probably in all of geological history. This World Population Day, humans number in the vicinity of 7.5 to 7.6 billion individuals.

Can the Earth support this many people indefinitely? What will happen if we do nothing to manage future population growth and total resource use? These complex questions are ecological, political, ethical – and urgent. Simple mathematics shows why, shedding light on our species’ ecological footprint.

The mathematics of population growth

In an environment with unlimited natural resources, population size grows exponentially. One characteristic feature of exponential growth is the time a population takes to double in size.

Exponential growth tends to start slowly, sneaking up before ballooning in just a few doublings.

To illustrate, suppose Jeff Bezos agreed to give you one penny on Jan. 1, 2019, two pennies on Feb. 1, four on March 1, and so forth, with the payment doubling each month. How long would his $100 billion fortune uphold the contract? Take a moment to ponder and guess.

After one year, or 12 payments, your total contract receipts come to US$40.95, equivalent to a night at the movies. After two years, $167,772.15 – substantial, but paltry to a billionaire. After three years, $687,194,767.35, or about one week of Bezos’ 2017 income.

The 43rd payment, on July 1, 2022, just short of $88 billion and equal to all the preceding payments together (plus one penny), breaks the bank.

Real population growth

For real populations, doubling time is not constant. Humans reached 1 billion around 1800, a doubling time of about 300 years; 2 billion in 1927, a doubling time of 127 years; and 4 billion in 1974, a doubling time of 47 years.

On the other hand, world numbers are projected to reach 8 billion around 2023, a doubling time of 49 years, and barring the unforeseen, expected to level off around 10 to 12 billion by 2100.

…click on the above link to read the rest of the article…

Why do we need to think and act more systemically?

June 26, 2018

Why do we need to think and act more systemically?

The power and majesty of nature in all its aspects is lost on one who contemplates it merely in the detail of its parts and not as a whole.

— Pliny the Elder

An increasing number of people are beginning to understand that the world we participate in is too complex, magnificent and changeable for any single perspective to do justice to its diversity and complexity. There is more to life than a ‘theory of everything’ that reduces the awe-inspiring diversity, creativity and beauty surrounding us to a series of abstract mathematical equations.

We live in networks of relationships defined by qualities that make life worth living. Most qualities escape quantification and mathematical abstraction. We need to acknowledge and value multiple perspectives and find ways to integrate their different contributions into a framework of thinking that can inform wise action.

In order to achieve a collaborative way of acknowledging, integrating and evaluating multiple perspectives, we need to move beyond dualistic either-or logic which suggests that, if two perspectives seem to contradict each other, one of them must categorically be wrong in order for the other perspective to be right. Yet, at a time when our cultural belief in the ability of science and technology to fix all our problems is beginning to wane, we also need ways to evaluate and compare different perspectives.

Science might not offer us the ‘objective’ picture of reality we were taught in school, but it remains a powerful method of inter-subjective consensus-making and constitutes a fairly reliable basis upon which to act — more so, say, than the opinion, intuition or spontaneous insight of a single individual — in most but certainly not all cases. We should neither exclusively favour inter-subjective ‘rational’ reasoning nor only rely on individual insight and intuition, but let ourselves be informed by both, as and when appropriate.

…click on the above link to read the rest of the article…

Can We Ascertain the Facts of Reality in Economics by Means of Mathematics?

February 5, 2018

CAN WE ASCERTAIN THE FACTS OF REALITY IN ECONOMICS BY MEANS OF MATHEMATICS?

It is generally held that by means of statistical and mathematical methods one can organize historical data into a useful body of information, which in turn can serve as the basis for the assessments of the state of the economy. It is also held that the knowledge secured from the assessment of the data is likely to be of a tentative nature since it is not possible to know the true nature of the facts of reality.

Some thinkers such as Milton Friedman held that since it is not possible to establish “how things really work,” then it does not really matter what the underlying assumptions of a theory are. On this way of thinking, what matters is that the theory can yield good predictions.

According to Friedman,

The ultimate goal of a positive science is the development of a theory or hypothesis that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed…. The relevant question to ask about the assumptions of a theory is not whether they are descriptively realistic, for they never are, but whether they are sufficiently good approximation for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.[1]

For instance, an economist forms a view that consumer outlays on goods and services are determined by disposable income. Based on this view he forms a model, which is then validated by means of statistical methods. The model is then employed in the assessments of the future direction of consumer spending.

If the model fails to produce accurate forecasts, it is either replaced, or modified by adding some other explanatory variables.

…click on the above link to read the rest of the article…

St. Louis Fed Promotes the Mathematically Impossible

December 19, 2017

It’s bad enough when economic writers are clueless about how markets work. It’s worse when Fed economists are clueless.

Check out this Tweet by @StLoiusFed.

✔@stlouisfed

Negative interest rates may seem ludicrous, but not if they succeed in pushing people to invest in something more stimulating to the economy than government bonds http://bit.ly/2ASFrRz 

170 people liked this Tweet.

Understanding the Math

  • Negative interest rates cannot push people into more stimulating investments.
  • No matter how negative the rate, someone has to hold every treasury bond and someone has to hold every dollar in circulation.
  • In the equity markets, for every buyer of stocks, there is a seller, thus the sideline cash argument fails as well.

It’s bad enough when analysts fail to understand basic economics, but even Fed economists are clueless about how markets work.

Negative rates cannot possibly do what the Fed suggests, but they can foster an artificial wealth effect when people borrow or spend more than they should.

Any economic gain spurred on by reckless borrowing will all be taken back and then some, in the next recession.

Zombie Corporations

Negative real rates also foster zombie corporations. The BIS defines Zombie firms as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more.

As it sits, 10% of corporations are zombies, unable to make interest payments from profits.They need cheap money to survive.

If the St. Louis Fed economists see a sustainable benefit from spurring zombie corporations, they are wrong about that too.

Is Capitalism Dead or Merely Dying?

October 22, 2017

Is Capitalism Dead or Merely Dying? 


Alfred Wertheimer Elvis 1956
 

New Zealand’s new prime minister Jacinda Ardern calls capitalism a blatant failure. Former Greek finance minister Yanis Varoufakis says capitalism is ‘merely’ coming to an end because it is making itself obsolete. Mathematics professor Bruce Boghosian claims that without redistribution of wealth, our market economy would not be stable, because wealth always tends to concentrate. The people at Artemis Capital Management write that the stock market has begun self-cannibalizing like a snake eating its tail, and the only reason we’re not in a recession already is ‘financial alchemy’.

At the very least we can say that the system is under pressure. But what system is that? It would be nice to have a clearcut definition of capitalism, but alas, there are many, about as many as there are different forms of it. That doesn’t make this any easier. Americans call many European economies ‘socialist’, which seems to mean they are not capitalist. But Scandinavian countries don’t function like the Soviet Union either.

And if you see how much money is involved in transfer payments to citizens in the US, the supposed bastion of free market capitalism, it’s tempting to conclude the system has already failed. But even with transfer payments, inequality is at record levels. That would seem to confirm Boghosian’s statement that “even if a society does redistribute wealth, if it’s too small an amount, “a partial oligarchy will result..” So what then?

Varoufakis and others want a “universal basic dividend”, or “universal basic income”. Would that be the end of capitalism as we know it? Or is it just a -perhaps more extreme- form of ‘state capitalism’? Varoufakis deems it inevitable because technology will eradicate so many jobs from societies that people won’t be able to make money from work. Personally, I’ve long thought that the pending large-scale demise of pensions systems will lead to some form of UBI.

…click on the above link to read the rest of the article…

Can Mathematicians Forecast Markets?

January 17, 2016

Can Mathematicians Forecast Markets?

Mandelbrot Benoit

QUESTION: Greetings Mr Armstrong and thank you for your excellent blog!

I have recently started reading Benoit Mandelbrot’s The Misbehaviour of Markets in which he states that stock prices probably isn’t predictable in any useful sense of the term (p. 6).

I recall that you have stated that stock prices can be predicted but not by non-traders which Mandelbrot said he was. I’m curious to this discrepancy which probably won’t find an answer since successful traders like yourself don’t like to reveal their secrets to their edge. Wouldn’t mathematicians like Mandelbrot eventually also find a way to predict prices?

ANSWER: No. You cannot forecast something based upon math or fundamentals and the greatest of all math never reveals behavior for that is cyclical. So many people fail to even understand that TIME and PRICE are two separate forecasts and saying the Dow can reach 23,000 by the 2015.75 turning point is not taking away from the fact that there is a turning point regardless of the price achieved. Since most people cannot comprehend there are two dimensions, how can they ever forecast anything?

Many people in the industry have attempted to duplicate what I have accomplished. They knew I had a physics background and began hiring “quants” in the 1980s and thought that was my secret. This assumption led to total disaster and the Long Term Capital Management Collapse which they called – When Genius Failed. There is something which exists that is indescribable; a Sixth Sense if you will. This is a dimension which somehow we draw upon which has produced the source of the phase: those who can, do; and those who can’t teach.

Brain-Surgery

I was asked this question once years ago at a conference. What I tried to describe was really indescribable. It is a sense of just knowing, instinctively perhaps, which emerges from a synergy of experience to whatever we are exposed to.

…click on the above link to read the rest of the article…

What’s the last dollar they can print before financial crisis?

January 11, 2016

Money-printing-inflation

What’s the last dollar they can print before financial crisis?

In the field of mathematics, chaos theory studies the behavior of systems that are highly sensitive to initial conditions.

The idea in chaos is that, like life itself, where you start today has tremendous influence on what happens next.

In chaos, even very tiny changes to initial conditions can lead to wildly divergent outcomes further down the line.

Again, think about life: how different would your outcome be if you’d been born in the next town over? Or to different parents?

The film ‘Jurassic Park’, adapted from Michael Crighton’s novel, brought chaos theory into the popular realm.

A wealthy scientist, John Hammond (played by Richard Attenborough), uses DNA derived from fossilized mosquitoes to recreate dinosaurs on a remote island.

But once brought back to life, won’t they breed?

No, says Hammond. Because all the dinosaurs on the island are engineered to be female, by way of chromosome control.

Dr. Ian Malcolm, a chaos expert played by Jeff Goldblum, has been brought along to assess the project. His assessment is skeptical to the point of hostility:

“[T]he kind of control you’re attempting is not possible. If there’s one thing the history of evolution has taught us, it’s that life will not be contained. Life breaks free. It expands to new territories. It crashes through barriers. Painfully, maybe even… dangerously…

“I’m simply saying that life… finds a way.”

Life -nature- does indeed find a way, and Malcolm barely survives into the inevitable sequel.

Jurassic Park is, of course, a work of fiction.

That central banks that exist today, on the other hand, are fact.

And it is fact that for several years they have been attempting to artificially manipulate the market.

…click on the above link to read the rest of the article…

Bill McKibben: The Planet’s Future Depends On Distributed Systems

July 6, 2015

Bill McKibben: The Planet’s Future Depends On Distributed Systems

One of the best ways to address climate change

To environmental activist Bill McKibben, it’s all about math. The planet has warmed 1 degree Celsius over the past few decades and is on track to rise another 4 to 5 before the end of the century. An increase of this magnitude is simply too much for the ecosystems we depend on to adapt to that quickly.

Much of the observed warming is due to the fossil hydrocarbons humans burn for energy and industry. McKibben predicts, whether by foresight or necessity, new sustainable energy and agricultural systems will emerge that will drastically reduce the greenhouse impact our modern lifestyle is having on the planet. These will be revolutionary not just for their “greenness”, but also because they will be distributed — disrupting the monolithic control of the current large energy and food producers:

In the late 80’s when I wrote the first book about all of this, we knew trouble was coming. The basic science is not that difficult: with its molecular structure, more CO2 is gong to trap heet that would otherwise radiate back out to space. What we didn’t know was how fast that trouble was coming or really on what scale.

Unfortunately, in the quarter century since, what we’ve learned is that this is happening harder and faster than we would of thought. 25 years ago, no scientist would have thought that at this point we would have melted most of the summer sea ice in the Arctic — they would have said that’s still 50 or 75 years off. No one would have even bothered to really measuring the PH of the oceans, because we didn’t think we could substantially alter something that vast. Certainly, no one would have worried that, as we learned about a year ago, the West Larsen Antarctic ice sheet seems now to be fundamentally destabilized and beginning its slide into the southern ocean. And I think no one would of guessed the degree to which we’ve seen perturbations of the hydrological cycle, the way that water moves around the planet.

 

…click on the above link to read the rest of the article…

It’s time to ‘Do the math’ again

April 28, 2015

It’s time to ‘Do the math’ again

Have we gone mad? A new reportreleased today explains why contemporary climate change policy-making should be characterised as increasingly delusional.

As the deadline approaches for submissions to the Australian government’s climate targets process, there is a flurry of submissions and reports from advocacy groups and theClimate Change Authority.

Most of these reports are based on the twin propositions that two degrees Celsius (2°C) of global warming is an appropriate policy target, and that there is a significant carbon budget and an amount of “burnable carbon” for this target, and hence a scientifically-based escalating ladder of emission-reduction targets stretching to mid-century and beyond.

A survey of the relevant scientific literature by David Spratt, “Recount: It’s time to ‘Do the math’ again”, published today by Breakthrough concludes that the evidence does not support either of these propositions.
The catastrophic and irreversible consequences of 2°C of warming demand a strong risk-management approach, with a low rate of failure. We should not take risks with the climate that we would not take with civil infrastructure.

There is no carbon budget available if 2°C is considered a cap or upper boundary as per the Copenhagen Accord, rather than a hit-or-miss target which can be significantly exceeded; or if a low risk of exceeding 2°C is required; or if positive feedbacks such as permafrost and other carbon store losses are taken into account.

Effective policy making can only be based on recognising that climate change is already dangerous, and we have no carbon budget left to divide up. Big tipping-point events irreversible on human time scales such as in West Antarctica and large-scale positive feedbacks are already occurring at less than 1°C of warming. It is clear that 2°C of climate warming is not a safe cap. 

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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