It’s quite simple.
h/t Lance
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/s4RaV6iTGnQ/story01.htm Tyler Durden
another site
Submitted by Peter Tchir of TF Market Advisors,
A Pseudoscience Stuck in Place
I am growing more concerned by the day by the actions of the central banks. It isn’t just that markets popped and dropped dramatically before and after Draghi’s rate cut, or that any policy seems particularly bad, just that the policies don’t seem to be working great, and are leaving a changed landscape that will need to be corrected, somehow, in the future. I am quite simply concerned that too much faith is being placed in untested theories that may or may not work, or may or may not even be correct.
Here are a few things that concern me the most:
1. Central Bankers seem to rely on economic theories that have remained largely unchanged for years
2. Central Bankers seem of an age that they aren’t willing to incorporate theories that might change their favored models or might make those models too complex to be easily understood by those in charge (the Nobel prize committee has given out multiple awards for work in behavioral economics, yet central bank models seem to rely on pretty basic econometric models where behavior doesn’t rapidly change based on policies)
3. Central Bankers seem focused on domestic issues without really considering the ramifications and ripple effects that they potentially create
From Newton to Bohr
I liked Newtonian physics. I could do the math easily and it was intuitive. It was so easy that I took physics 101 right along with econ 101 because I needed some easy A’s.
But physics has changed. The relatively simple world of Newtonian physics turned out to be inadequate to explain what was needed to propel science forward. As comforting as it was to know that “each and every action has an equal and opposite reaction” that just doesn’t cut it in high end physics.
Personally, I started to lose interest and any real intuitive skills in physics around the time we learned that light is both a wave and a particle. The math was getting more complex, but I could muddle my way through that. What I lost was any instinctive or intuitive feel for what was being modeled. I tended to focus on areas that I felt comfortable with, hampering any potential for intellectual growth.
Quantum mechanics really revolutionized physics. It was a new paradigm and you either had to adapt, understand it, or get some intuitive feel because brute force math might be enough to be adequate in the field, but not enough to excel.
I wonder why economics hasn’t had its “quantum mechanics” moment?
Did Keynes and Hayek really discover all there is to know? Is Yellen’s beloved “Taylor rule” really the epitome of the “scientific” advancement of economics? I realize there have been advances, but most seem to be “more of the same”. No one seems to have challenged the central tenants of macroeconomics.
In physics, once Newtonian physics failed to explain the world, brilliant minds concocted experiments to test hypothesis. This is what led to quantum mechanics. The old theory was failing in that it couldn’t explain some observed phenomena, so it was ultimately supplanted by a new, much more complex theory, but one that explained much more of what was observable.
Why is that not happening in economics? Personally, I don’t think economics has done a great job in explaining the world, otherwise we shouldn’t have so many periods of boom and bust globally.
Maybe it is the inability to experiment? This is potentially a bigger issue than it seems at first. We do experiment in economics, but it is a small group of elite, and mostly collegial economists who get to experiment. Actually they get to put their beliefs into practice and then argue that the situation is better than if they hadn’t been allowed to implement their theories. While costs and access can stop scientific progress, there certainly was a time that it was more readily available. Hypothesis could be tested and failures catalogued and successes expanded on AND verified by repetition. This capability just doesn’t exist in macroeconomics. There are NO TWO economies that are identical except for the policies implemented.
Young professors could and did challenge the system in the hard sciences. It is probably no co-incidence that most scientific Nobel prizes are awarded for work “conceived of” when the person was in their 20’s and “performed” in their 30’s. That might be a generalization, but it isn’t entirely inaccurate.
Maybe economics is failing to attract good new people? There may be something to this. To some extent the economists that I know and respect the most (yes, I do like and respect some economists) had strong quantitative skills but an interest in business. The didn’t want to be a “math” geek and liked working with the “real world”. I am willing to make the conjecture that as computer science grew and the opportunities there grew, it was an even better match for many quantitative students who wanted something other than pure math, or physics, or chemistry, than economics. Maybe even as MBA’s started looking for more “quants” even more people who would be the new economists didn’t pursue that?
Or maybe economists just ignore their own? I have read a little about “behavioral economics”. My take is that it demonstrates that people don’t always do what would produce the best “expected outcome”. That the “rational man” that economic models are built on may not exist, and what is rational on a purely “economic” level might not be applicable on an overall evaluation. We tend to hate losses more than we like winning. How is that incorporated into the econometric global macro models used by the Fed? The Fed runs the treasury/dividend yield model. Yeehaw, except for the graphs that is nothing a good old fashioned HP12C couldn’t handle. Why aren’t we incorporating some new techniques? Maybe, because just like I hit the wall in physics at a certain point, the economists in charge have no interest in trying to incorporate things into their models that they don’t intuitively understand, might call into question their own body of “prestigious” work, and where quite frankly they might not have the technical expertise needed to incorporate them?
The Observer Effect. Science understands that the act of observation can actually impact whatever is being observed. Attempting to measure something affects the measurement. First, I question how that plays into anything that is a “survey” or that is “subjective” in the first place. How many purchasing managers hoping for better year-end bonuses say things are better than they are because they know their boss will like it, and at this point, they know the stock market will like it. What about the “household survey” for non farm payrolls that we will get tomorrow. Does it make a difference how you respond depending on your political party? Does it amaze you that we still conduct door to door surveys to figure out how many Americans are working? This is all a relatively minor effect, yet probabl
y real, and as far as I can tell, largely ignored at the “policy” level.
Learned Behavior. Humans learn over time. We are pretty adept and maximizing return while minimizing risk. This is where I think economics does the worst job of integrating its own new theories. QE seems based on a pretty simplistic model. Provide more money, take risky investments out of the market, and the market will take that money and be encouraged to take more risk. It will create asset price inflation which will encourage further real risk taking. What if it turns out it is easier not to take the risk but end up with a pretty darn good reward? How many companies took risk and a lot better off for it? But how many have decided it is easier to do some financial engineering and let QE take care of their stock price? How is that accounted in the models? It probably isn’t and is probably too complicated, but we don’t try and predict the weather by licking our finger and sticking it in the air, yet economists seem in many ways content to run their policy on little more than that.
Equal and Opposite Reactions. Such a basic concept. It extends beyond science. If you punch someone in the face, you can reasonably expect a certain reaction. You might be able to qualify even that reaction based on the size and personality of the person you punch in the face. Then why don’t we seem to use that in economics? We live in a global economy apparently some of the time, but inflation is local wage driven only? Hmm. Bernanke, who claims protectionism was part of the problem with the Great Depression, basically told the Emerging Market countries (through lackey’s in Jackson Hole) that we will do what we need and they can worry about themselves. Draghi cut rates today. What does that to their currency? Does that help or hurt what we have been trying to work on? Central bankers all too often seem to act as though they are playing golf when the game is really chess.
Kasparov to Big Blue
Which brings us to chess.
Maybe the central bankers are aware that they are playing chess. Maybe Bernanke is aware that each of his moves will cause another move by his “opponent” which he will then have to react to. The problem is that if he is playing chess, and he is “thinking a few moves ahead” he is assuming too much, and making a classic mistake of expecting his opponent to fall into his “traps”
In the early days of “computer” chess, a modestly better than average human player could beat most computers after a few matches. That was because of how computers evaluated the chess board. There were far too many moves for a computer to analyze all the possibilities. So they used “heuristics” to “score” boards. They found ways to estimate how strong or weak a position was. They could then “truncate” paths that lead to weak positions and explore only “strong” paths. The trick was figuring out what the computer was doing incorrectly. To take it down a path that looked “strong” for several moves that could be then turned around. The computer literally “fell for the trap”.
But “Big Blue” changed that. It literally was so fast that it didn’t have to “truncate” paths early. It could play out 200 million positions in a second and ultimately beat Kasparov. That was back in 1997.
It was a sad day for many since it turned something that was elegant with a certain flair where imagination was respected and turned it into a brute force mechanical process.
I am not arguing that economics is something that is purely brute force, but I do think there are two lessons to be drawn from this:
1. Computer power and the evolution and development of computer power to analyze complex systems is useful and I am not sure we do enough of that, and
2. Don’t expect people to make the moves you want them to make, expect them to make the moves that they think are in their own best interest
That latter point is critical, especially as we now have rates at 0% in Europe, Japan, and the U.S. We have QE programs in the U.K., the U.S., and Japan. We have who knows what in China. But each of these actions is causing other actions that may actually be the reason nothing seems to be working as well as it should in theory.
Do companies and executives really respond to QE the way the models predict or is their reaction different? Maybe their reaction produces a better outcome for the company than the reaction the central bankers want and need out of those executives?
Too much of policy seems to assume certain moves will be made by other players when it is far from clear that those moves are either optimal for those other participants from their overall perspective.
As our balance sheet grows, as we create negative real rates, are we really sure we aren’t doing more harm than good, and what will the world look like 10 moves from now, or 50 moves or 100 moves?
Sadly, I don’t think anyone honestly knows.
What Does this Mean?
Mostly it lets me get this off my chest. Somehow this topic has been bothering me a lot lately so I feel better having written about it.
But on a serious note, I think it is another reason to scale back positions. Liquidity already seems abysmal, and this is a market largely supported by the faith that central bankers can continue to support it. It is circular because the central bankers do keep getting forced to support it. The longer this goes on, the greater the risk that we find that there is a problem, and that this “circularity” has been distorting values to the detriment of the economy and that the market loses this crucial element of support.
I find more and more people questioning the usefulness of central bank policy. While I can see that the most likely path is a continued grind higher/tighter/better, it seems to me that there is growing doubt that the policies are working and any shift away from a full on love affair with central bankers is likely to be disruptive in a negative way. I still think that is a low probability event, but that risk is growing and at this stage of the year, with so little liquidity, keeping risk low and even slightly bearish now is the right trade.
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YBVrvaTzXdk/story01.htm Tyler Durden
You look familiar—says the cop
with the smartphone. And never mind that
FBI specifications allow for a faulty match up to 20 percent of the
time; local, state, and federal law enforcement officers based
in California’s San Diego and Imperial counties have quietly taken
to the streets with federally funded tablets and smartphones to
match the faces of people they meet with databased photographs. If
the experiment proves successful, in government terms, you can
probably expect the blend of cops, mobile devices, and facial
recognition software to come to a sidewalk near you.
For the Center for Investigative Reporting, Ali Winston
writes:
On a residential street in San Diego County, Calif., Chula Vista
police had just arrested a young woman, still in her pajamas, for
possession of narcotics. Before taking her away, Officer Rob
Halverson paused in the front yard, held a Samsung Galaxy tablet up
to the woman’s face and snapped a photo.Halverson fiddled with the tablet with his index finger a few
times, and – without needing to ask the woman’s name or check her
identification – her mug shot from a previous arrest, address,
criminal history and other personal information appeared on the
screen.Halverson had run the woman’s photograph through the Tactical
Identification System, a new mobile facial recognition technology
now in the hands of San Diego-area law enforcement. In an instant,
the system matches images taken in the field with databases of
about 348,000 San Diego County arrestees. The system itself has
nearly 1.4 million booking photos because many people have multiple
mug shots on record.The little-known program could become the largest expansion of
facial recognition technology by U.S. law enforcement. Amid an
international debate over collecting and sharing huge amounts of
data on the public, this pilot program is putting that metadata to
use in the field in real time.
Managed by the Automated Regional Justice Information System
(ARJIS), a joint project of 75 government agencies, and funded by
the National Institute of Justice, the
Tactical Identification System combines traditional mugshots
with controversial (and not entirely reliable) facial recognition
software, and puts it in the hands of police officers in the field.
The system deployed in California appears to draw only from booking
photos at the moment, but many states have already
linked facial recognition technology with their driver’s license
databases, multi-purposing everybody’s least favorite photos
into de facto police lineup images. Police lineup images with
uncertain access control and, as mentioned, a high potential
for false positives. It’s probably safe to assume that, if the
Tactical Identification System approach is replicated elsewhere,
police mobile devices will be linked with that wider range of photo
databases.
So, when do police officers in San Diego and Imperial counties
whip out their smartphones to identify passers-by? During arrests,
of course, but also during other encounters with the public.
One Immigration and Customs Enforcement agent who provided a
testimonial said he used the device during a warrant sweep in
Oceanside. While on the sweep, the agent wrote, his “ ‘spidy
senses’ were tingling” about the immigration status of a neighbor
of the person he was pursuing.He decided to run the man’s picture through the facial
recognition software. The agent discovered the man was in the
country illegally and had a 2003 DUI conviction in San Diego.“I whipped out the Droid (smartphone) and snapped a quick photo
and submitted for search,” the immigration agent wrote in his
testimonial for the Automated Regional Justice Information System.
“The subject looked inquisitively at me not knowing the truth was
only 8 seconds away. I received a match of 99.96 percent. This
revealed several prior arrests and convictions and provided me an
FBI #. When I showed him his booking photo, his jaw dropped.”
You never know when your photo will be snapped. So remember to
comb your hair before going out in public.
from Hit & Run http://reason.com/blog/2013/11/08/smile-for-the-cop-with-the-smartphone-an
via IFTTT
The reaction to the non-farm payrolls report in the US Treasury complex has the bond bears out en masse this morning. A 10-12bps jerk higher in yield is nothing to sneeze at and certainly flushed more than a few uncomfortable longs out – but BofAML’s MacNeil Curry warns “treasury bears beware.” The completing 5 wave advance and confluence of support between 2.738%/2.759% says further yield upside is limited. Don’t be max short into these levels. There should be better levels to sell in the days ahead.
Source: BofAML
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ymAL7PeWGKU/story01.htm Tyler Durden
The reaction to the non-farm payrolls report in the US Treasury complex has the bond bears out en masse this morning. A 10-12bps jerk higher in yield is nothing to sneeze at and certainly flushed more than a few uncomfortable longs out – but BofAML’s MacNeil Curry warns “treasury bears beware.” The completing 5 wave advance and confluence of support between 2.738%/2.759% says further yield upside is limited. Don’t be max short into these levels. There should be better levels to sell in the days ahead.
Source: BofAML
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ymAL7PeWGKU/story01.htm Tyler Durden
Tomorrow will mark the 75th
anniversary of the pogrom against Jews that took place across Nazi
Germany as well as parts of Austria known as
Kristallnacht.
Ahead of the anniversary, the European Union’s
Fundamental Rights Agency (FRA) has released
a survey on anti-semitism, which shows that Jews in Europe
feel that there has been an increase in anti-semitism in the past
five years.
From the FRA Survey:
Two thirds of the survey respondents (66 %) consider
antisemitism to be a problem across the eight EU Member States
surveyed, while on average three quarters of the respondents (76 %)
also believe that the situation has become more acute and that
antisemitism has increased in the country where they live over the
past five years. In the 12 months following the survey, close to
half of the respondents (46 %) worry about being verbally insulted
or harassed in a public place because they are Jewish, and one
third (33 %) worry about being physically attacked in the country
where they live because they are Jewish. Furthermore, 66 % of
parents or grandparents of school-aged children worry that their
children could be subjected to antisemitic verbal insults or
harassment at school or en route, and 52 % worry that they would be
physically attacked with an antisemitic motive while at school or
en route. In the past 12 months, over half of all survey
respondents (57 %) heard or saw someone claim that the Holocaust
was a myth or that it has been exaggerated.
According to the survey, almost a third of Jews in the eight
countries examined in the survey (where more than 90 percent of
European Jews live) have considered emigrating in the last five
years. The figure is especially high in Hungary, where almost half
of the Jews surveyed said that they have considered leaving.
Jobbik, Hungary’s anti-semitic and anti-Roma party, is the third most
popular party in the country.
While much of Europe’s anti-semitism continues to be based in
sort of nationalism and prejudices seen before the beginning of the
Second World War,
The New York Times’ reporting on the survey
points out that some of Europe’s more recent anti-semitism is
rooted in the political left and the comparatively recent
Muslim communities in Europe:
In other countries, however, hostility to Jews is now rooted
more on the left and in Muslim immigrant communities, the survey’s
findings indicate. More than three-quarters of respondents in
France and Belgium, both of which have large populations of Muslim
immigrants, identified anti-Semitism as a problem. Eighty percent
of respondents in these same two countries described immigration as
a problem, too, suggesting tense relations between Jewish
communities and recently arrived immigrants.About 90 percent of respondents in Belgium and France reported
that the Arab-Israeli conflict had had a “notable impact” on the
safety of Jews. Only 40 percent reported the same in Hungary, which
has few Muslim immigrants, while a majority of respondents in most
other countries surveyed said tensions in the Middle East had
affected their feelings of safety either a “great deal” or a “fair
amount.”
Read the full report below:
from Hit & Run http://reason.com/blog/2013/11/08/survey-shows-european-jews-report-rise-i
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Let me be the first, at the start of this holiday season, to apologize to all the moms out there. I really didn’t have a clue. Then again, I do have somewhat of an excuse – I’m a Neanderthal.
By now, at tender age of 55, you think I’d know, but alas, I didn’t. Now I’m beginning to understand. The role of mom is just about impossible. And that’s on a good day.
“Twas the night before Christmas, when all through the house, not a creature was stirring, not even a mouse.” It would be safe to say that over the next six weeks the preceding sentence will be read to children more than any other.
via The Citizen http://www.thecitizen.com/blogs/rick-ryckeley/11-08-2013/not-creature-was-stirring
Submitted by Martin Armstrong via Armstrong Economics,
An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.
The professor then said, “OK, we will have an experiment in this class on Obama’s plan”.. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).
After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.
The second test average was a D! No one was happy. When the 3rd test rolled around, the average was an F.
As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.
To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. Could not be any simpler than that.
Here are possibly the 5 key points about such an experiment:
1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.
2. What one person receives without working for, another person must work for without receiving.
3. The government cannot give to anybody anything that the government does not first take from somebody else.
4. You cannot multiply wealth by dividing it!
5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.
Or in graphical format…
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/iVGbjCBccrw/story01.htm Tyler Durden
Submitted by Martin Armstrong via Armstrong Economics,
An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.
The professor then said, “OK, we will have an experiment in this class on Obama’s plan”.. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).
After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.
The second test average was a D! No one was happy. When the 3rd test rolled around, the average was an F.
As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.
To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. Could not be any simpler than that.
Here are possibly the 5 key points about such an experiment:
1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.
2. What one person receives without working for, another person must work for without receiving.
3. The government cannot give to anybody anything that the government does not first take from somebody else.
4. You cannot multiply wealth by dividing it!
5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.
Or in graphical format…
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/iVGbjCBccrw/story01.htm Tyler Durden
With what few vacuum tube-based trading algos are left and reacting with rabid kneejerkiness to every flashing red headline, one would get the impression that what matters to the Fed’s decision on how to adjust its balance sheet flow depends on the US economy. But if Deutsche Bank is correct, the next source of global economic contraction, which it will be up to the Fed to offset (just like China was the marginal growth dynamo in the months after Lehman filed), and result in an increase in QE nevermind taper, is not in the US at all, but in China where things are about to go bump in the night. Which means that just like that we have moved into the “New Normal paradigm” where the worse the news out of China, the better for stocks.
From Deutsche’s Jim Reid:
Over the weekend, China’s inflation, industrial production and retail sales numbers for the month of October will be released. China’s much awaited Third Plenum meeting gets underway tomorrow where DB’s Jun Ma expects a wide ranging package of reforms will follow, in terms of industry deregulation, financial liberalisation, reforms to land titles, state-owned enterprises and social security. Our take on this is that there will be lots for the market to get excited about in the reforms but that it will not necessarily be easy to implement them successfully. Our GEM equity strategist JP Smith yesterday reiterated his bearish view on China and most of the EM complex. If he’s correct Yellen and Draghi are going to have interesting 2014s with the provocative thought being that Yellen may actually have to increase QE. Food for thought.
And just for thought, because very soon the bulk of the world’s population won’t be able to afford any other kind. Especially once the Fed is forced to start monetizing Big Macs.
via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Hgx-zLdk0Uw/story01.htm Tyler Durden