Thursday, December 31, 2020

"The End of Free Markets and The New Alchemy"

 From Price Action Lab:

After two back-to-back massive bear markets in the 2000s with losses in excess of 50%, the central bank finally stepped in and has since provided virtually unlimited support to equities in the form of quantitative easing and verbal interventions. That was the end of free markets and the beginning of a new age of alchemy.

In this article, we define a bear market as the usual drop in S&P 500 in excess of 20%. From 1960 to 1980, there were five such bear markets as shown in the chart below.

Then, in 2000s, there were two back-to-back bear markets due to dot-com bust and the financial crisis. Why did the central bank intervene after the financial crisis in support of the markets? There are possibly many reasons but in my opinion the main two are the following:

  1. More people nowadays depend on equity portfolio returns for their retirement than in the 80s.
  2. The market dynamics favored a further collapse.

We will concentrate on the second reason in this article. From the above chart, it may be seen that from about 1965 to around the late 80s, the 1-lag, 252-day autocorrelation of daily S&P 500 returns was high. This means that during those times returns exhibited momentum. This further means that positive daily returns had higher probability of being followed by positive daily returns. After 2000, returns became mean-reverting. This means that positive daily returns have higher probability of being followed by negative daily returns. So, why is this important?

To start with, the causes of this fundamental regime shift cannot be identified with high certainty. The shift probably occurred due to a combination of overvaluations, introduction of algorithmic trading and crowded trades in momentum. But the regime shift is a fact and this is all that counts.

In fact, from high positive autocorrelation the dynamic changed recently to extreme negative autocorrelation as shown in above chart. What does this mean?

In a nutshell, it means that after the market drops there is a reversal to the upside. Traders have called this phenomenon “buy the dips”. But who are compelled to buy the dips when it is obvious from forums that the majority of traders are bears and like the short side? The answer is, investors and probably companies buying back their shares. And why do they buy the dips? Because they are convinced the central banks will continue to support markets.

The chart below shows the percentage of down days in a 252-day rolling period that are followed by up days....


On This Date in 1935 the Game "Monopoly" Was Patented (economist Henry George does a cameo)

"I think it's wrong that only one company makes the game Monopoly"
-comedian  Steven Wright

We've looked at Henry George a few times, links after the jump.
First up, from

December 31, 1935: Charles Darrow patents the board game Monopoly 
A salesman granted himself a licence to print money when he patented the World's most popular board game on this day in 1935. 
The most successful board game of all time, Monopoly - which would go on to be printed in more than 40 languages and licensed in well over 100 countries – was patented on this day in 1935 by a salesman from Philadelphia named Charles B. Darrow.

After convincing the Parker Brothers company to publish the game, its ongoing success would make Darrow the first ever millionaire game designer. It would later be established, however, that Monopoly was simply a development of other, previously existing board games which dated back to the turn of the century.
Charles B. Darrow with his money-spinning invention.
In 1903, an anti-monopolist named Elizabeth ‘Lizzie’ Magie had created what she called The Landlord’s Game, intended to show the negative aspects of allowing too much land to be held by private monopolies. She took out her own patent a year later....MORE
BT knows a thing or two about monopolies, past and present.

And From Henry

How Henry George's Principles Were Corrupted Into the Game Called Monopoly
History is filled with surprising stories of how people and ideas are connected. One such story is that of the origins of the most popular board game in modern history. It's an American classic: each new generation of Monopoly players learns to love (harmlessly) indulging its cutthroat, ruthless, greedy impulses. Players begin the game as equals. Luck — and a bit of strategy — eventually enables one player to dominate all others. That player ends up amassing a huge fortune in cash and real estate. Most Monopoly players don't know (or care) that this game was originally the product of a passion for social and economic justice. In the late 1800s, a young woman named Elizabeth Magie was introduced to the writings of Henry George by her father. She eventually became one of many people who took on the task of trying to teach others what she had learned from studying Progress and Poverty and George's other works.
Collaborating with friends in her Brentwood, Maryland community, Elizabeth Magie created The Landlord's Game. She applied for a patent, which was granted on January 5th, 1904 (No. 748,626). She explained that the game was to be a "practical demonstration of the present system of land-grabbing with all its usual outcomes and consequences."

While still a young, single woman, Elizabeth -- or "Lizzie" as she came to be called -- became a regular visitor to the Single Tax enclave of Arden, Delaware. This was around 1903. Whether on her own or in conjunction with other Single Taxers in Arden, Lizzie continued to work on the design of The Landlord's Game as a way to explain how Henry George's system of political economy would work in real life.

Arden landmarks: Stephen's Theater and the Craft Shop.
For a close-up look at the game board used in Arden, Click here.

The First Commercial Versions of The Landlord's Game

In 1906, Elizabeth moved to Chicago, Illinois, where she met, and in 1910 married, Albert Phillips. I have not been able to find any reference to Albert as a follower of Henry George, but evidently he was sympathetic to his wife's efforts. At some point in 1906 Elizabeth and a number of other followers of Henry George established the Economic Game Company of New York, which published The Landlord's Game.
Sometime soon thereafter Elizabeth and Albert moved to Clarendon, Virginia, in the Washington D.C area and eventually patented a new edition of The Landlord's Game in 1924 (No. 1,509,312) under her married name of Elizabeth Magie Phillips. This new edition, published by the Washington, D.C. firm, Adgame Company, appeared in 1932 and included named streets and other changes in the appearance of the board. More importantly, the new edition included a second, alternative, set of rules and a second name for the game, Prosperity.

Connections with Academe

Around 1900, Scott Nearing was introduced to The Landlord's Game by either Lizzie Magie or other residents of Arden. He was at the time a full-time resident of Arden. Nearing went on to become a member of the economics department at the University of Pennsylvania in 1906, where he used The Landlord's Game in his teaching. His support of Henry George's proposals to raise pubic revenue exclusively from those who owned land, and his opposition to child labor, caused him to be dismissed from the university in 1915.
Burton H. Wolfe, in "The Monopolization of Monopoly" (San Francisco Bay Guardian, 1976), says that "Nearing played The Landlord's Game with his brother, Guy Nearing, who lived in the Henry George single tax community of Arden, Delaware." Then:
As the students and single taxers played the game, they began a process ... of altering the rules. The main change was that instead of merely paying rent when landing on a property block, the players could hold an auction to buy it.       They also made their own game boards so that they could replace the properties designated by Lizzie Maggie with properties in their own cities and states; this made playing more realistic. As they drew or painted their own boards, usually on linen or oil cloth, they change the title "Landlord's Game" to "Auction Monopoly" and then just "Monopoly".
Burton Wolfe also tells us that a young Rexford E. Tugwell was one of the players. One of Tugwell's own students, Priscilla Robertson -- long-time editor of The Humanist -- provided the following details on the early history of the game: "In those days those who wanted copies of the board for Monopoly took a piece of linen cloth and copied it in crayon. It was considered a point of honor not to sell it to a commercial manufacturer, since it had been worked out by a group of single taxers who were anxious to defeat the capitalist system." (I am obliged to note here the considerable misrepresentation of the objectives pursued by Single Taxers who shared Henry George's principles. Defeating monopoly in all its forms (but, particularly, monopoly of nature), not capitalism, was - and is - the cause embraced then and today.)

Other writers note the game was played by students at Princeton University and Haverford College. Changes were made to the board design, gathering the properties into groups, allowing buildings to be added to the locations and increasing the amount of rent charged based on the number of like properties owned.

By the late 1920s, the version of the game being played by college students and others had evolved quite a bit from Elizabeth's design. The game was now generally referred to as "Monopoly." A young student at Williams College (Reading, Pennsylvania) produced a commercial version under the name Finance, but the game was essentially Monopoly. Then, a woman named Ruth Hoskins who learned the game in Indianapolis moved to Atlantic City, New Jersey and supposedly created the version that included the Atlantic City street names.

Then the plot thickens. The game was introduced by Eugene (Colonel) and Ruth Raiford, friends of Ruth Hoskins, to Charles Todd, who lived in Germantown, Pennsylvania; and, Charles Todd then introduced the game to Charles and Esther Darrow. Eugene Raiford, Charles Todd and Esther Jones Darrow all attended the Quaker Westtown School from 1911 to 1914 or 1915. The subsequent connection with Atlantic City occurred because of the close association of the Westtown School with the Atlantic City Friends' School. As Todd later recalled: "The first people we taught it to after learning it ... was Darrow and his wife Esther. ...It was entirely new to them.... Darrow asked me if I would write up the rules and regulations and I wrote them up ... and gave them to Darrow."...

And Henry George?
...In a January 1936 interview in The Washington Star, Elizabeth was asked "how she felt about getting only $500 for her patent and no royalties ever. She replied that it was all right with her "if she never made a dime so long as the Henry George single tax idea was spread to the people of the country."...
Sunday, February 21, 2016 
Forgetting History: "Nothing Like This Has Ever Happened Before"
Back in 2012 there occurred one of those eruptions of comment* that seem to happen for no discernible reason other than some combination of network effects and echo chambers.

The eruptions peak and die away as the crowd moves on leaving almost imperceptible ripples where there had been much thunder and fury.

This is a reflection on one of them, Henry George and the land tax, updated for current values and valuations.

From TechCrunch, Jan. 29, 2016:
“Capitalists both in the Old World and the States, even now, have but little faith in California. They regard this country and everything relating to it as one grand bubble, liable to burst at any moment…. This is how it should be. The wealth of California is thereby passing into the hands of young, active, enterprising men, who in an older country and with these same old capitalists as competitors might have worked to the end of their days, and realized but a mere pittance.” — San Francisco Daily Journal of Commerce, 1850
“It is as though an immense wedge were being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down.” — Henry George, Progress and Poverty, 1879

*Even by the time we posted "The Economist Calls for More Taxes on Land" in July 2013 the commentariat was moving on:
They are a bit late getting to the party, this discussion has been pursued in relation to the means of production for years and as far as our little corner of the www goes, we made mention of the FT Alphaville robo-rentier commentary back in 2012's "The Road to Serfdom: Where the Robots Are Taking Us":
Not Hayek's "The Road to Serfdom". Rather this is a journey back to medieval society where all income is subject to taxation by the Church or the manor or both. At least in the current case it is freehold rent which is paid in cash rather than the labor rent that villeins and serfs owed their liege.

Let me explain....

Wednesday, December 30, 2020

With The Financial Times' FT Alphaville Going Behind the Paywall, I Am Torn

We try very hard to respect the FT's terms and conditions, they are the scrappy fighter going up against the Bloomberg billions and the Murdochian mechanations at Dow Jones, not to mention Reuters with their fancy machine readable and low latency feeds and all the loot from Refinitiv, but over the years we have taken to copy/pasting paragraphs so our readers can garner enough information to decide if the story at hand is something the information imbiber wishes to pursue. 

I hate blind links and even though a right-click, open in new tab, backspace button sequence only takes a few seconds it seems, like a microwave oven reheating your coffee/tea, to take forever. So what to do?

Haven't decided.

But for now here's something for the archivists at the Financial Times who may not have this stuff after some tech changes. And here's hoping they cut me a little slack if I snip more than the attorneys think is proper commercial conduct.
(note to barristers and solicitors: this blog is a long, long way from being a commercial venture)
From the last time Alphaville made a major change:
They aren't truly missing. Some people have them. GCHQ and the NSA have them. The Israelis and the Russians do too. The Chinese are probable, as are the Swiss and Norwegians.
So the question becomes how much of the Markets Live output is accessible to the average investor?
The answer to that is quite a bit.

With the penultimate post, starring Bryce Elder as Master of Ceremonies/Ringmaster being published on Thursday, November 7, 2019; and the final post reuniting Paul Murphy and Neil Hume on November 8 we now have the born - died dates.

Mr. Murphy, FT Alphaville's founder puts ML's lifespan at 13 years and 18 days which seems so short.
And because of a quirk or five in the URL's there are two possibilities for the date of the first post, October 22 or October 23, 2006.
My favorite tech guy, Siva, a streetwise Hindu boy (CalTech postDoc) says this is probably because the first post was written on Sunday the 22nd and posted on Monday the 23rd.

And speaking of tech, you'll note the sweet innocence of Paul's take on the platform in this first post, something common among young prodigies which, while true at the very moment of launch, embedded the problems which became apparent with each successive upgrade until, as we saw in today's final sign-on:
PM is this thing bloody working?!?!!?
Good one Paul.
So let's begin at the beginning, when the earth was fresh and new and said world had never seen anything quite like Markets Live or for that matter FT Alphabille:
Markets Live
This innovative approach to market reporting uses modern messaging technology to provide readers with real-time commentary on which asset prices are moving, and why. The service will commence each day at 11am, initially for one hour, with two of our most experienced market-watchers holding a live “conversation.” Registered readers are invited to join the conversation through an adjacent “Comment” box.
Throughout the weekend we'll post some of the more memorable snips, including the collapse of Northern Rock in 2007 and the Great Financial Crisis of aught-eight - aught-nine. Also scheduled are some of our favorite posts by Bryce Elder and his attempts to keep everyone from getting sued for libel or other forms of definition of character.

Finally, if the passing of Markets Live has resulted in an ineffable, inconsolable sadness, take heart from the observation of a helpful colleague "13 is actually 91 in blog years."

More to come.
(there's the whole fall of Lehman thing plus...)

Meanwhile in Britain....

From Big Brother Watch:

And to think it was just five years ago, when the earth was fresh and new [see post above], that we were playing games with GCHQ:

January 31, 2016
Okay Spy Guys and Spy Gals: Did Anyone Crack the GCHQ Puzzle?

Feb 7, 2016
Spy Stuff: The Answers To GCHQ's Director's Puzzle

Just kidding about the fresh and new bit.

British Spy Guys, GCHQ, Data Collection Regime Violated Human Rights, Court Rules
As the NSA giggles, points, and guffaws at their busted brethren.
No comment from the GOOG or FB.

"Korean Shipbuilders Report LNG Carrier Ordering Spree"

Somebody's betting there's going to be a market for the cold stuff.

From Offshore Energy, December 24:

In the last few days of December 2020, South Korean shipbuilders are witnessing a surge in liquefied natural gas (LNG) carrier orders.

Since 21 December, Samsung Heavy Industries (SHI) secured orders for the construction of eight LNG carriers and Korea Shipbuilding & Offshore Engineering Co. (KSOE) for nine LNG carriers.

On 23 December, SHI said it signed a KRW 815 billion ($734 million) deal with a shipowner from Africa. The deal covers four LNG carriers to be delivered by 31 May 2024, according to information SHI provided in a stock exchange filing.

What is more, SHI unveiled two separate LNG carrier construction deals with Oceania-based companies on 21 and 22 September. The first deal, valued at KRW 408.2 billion, encompasses two vessels planned for delivery by the end of February 2024. The second order, worth KRW 403.5 billion, includes two units scheduled to be handed over by 30 September 2024.

The shipbuilder has so far this year received orders worth $5.5 billion, representing 65% of its annual target, according to Yonhap News Agency....


Hydrogen Storage: A New Form Of Ice

The science fiction writer Isaac Asimov was also a trained chemist: PhD, Columbia, post doc, taught biochem at Boston Uni's Med school etc.

And he was fascinated by water. See after the jump.

From the American Association for the Advancement of Science', EurkAlert, December 22:

Chemists describe a new form of ice
Skolkovo Institute of Science and Technology (Skoltech)

Scientists from the United States, China, and Russia have described the structure and properties of a novel hydrogen clathrate hydrate that forms at room temperature and relatively low pressure. Hydrogen hydrates are a potential solution for hydrogen storage and transportation, the most environmentally friendly fuel. The research was published in the journal Physical Review Letters.

Ice is a highly complex substance with multiple polymorphic modifications that keep growing in number as scientists make discoveries. The physical properties of ice vary greatly, too: for example, hydrogen bonds become symmetric at high pressures, making it impossible to distinguish a single water molecule, whereas low pressures cause proton disorder, placing water molecules in many possible spatial orientations within the crystal structure. The ice around us, including snowflakes, is always proton-disordered. Ice can incorporate xenon, chlorine, carbon dioxide, or methane molecules and form gas hydrates, which often have a different structure from pure ice. The vast bulk of Earth's natural gas exists in the form of gas hydrates.

In their new study, chemists from the United States, China, and Russia focused on hydrogen hydrates. Gas hydrates hold great interest both for theoretical research and practical applications, such as hydrogen storage. If stored in its natural form, hydrogen poses an explosion hazard, whereas density is way too low even in compressed hydrogen. That is why scientists are looking for cost-effective hydrogen storage solutions.

"This is not the first time we turn to hydrogen hydrates. In our previous research, we predicted a novel hydrogen hydrate with 2 hydrogen molecules per water molecule. Unfortunately, this exceptional hydrate can only exist at pressures above 380,000 atmospheres, which is easy to achieve in the lab but is hardly usable in practical applications. Our new paper describes hydrates that contain less hydrogen but can exist at much lower pressures," Skoltech professor Artem R. Oganov says....


One of Asimov's riffs on water, "Not as We Know it: The Chemistry of Life" he uses this little paragraph as a jumping-off point:

Water is an amazing substance with a whole set of unusual properties which are ideal for life-as-we-know-it. So well fitted for life is it, in fact, that some people have seen in the nature of water a sure sign of Divine providence. This, however, is a false argument, since life has evolved to fit the watery medium in which it developed. Life fits water, rather than the reverse.

In his book "The Left Hand Of the Electron" Dr. A gathers essays he had written over the years:

The Thalassogens
Subject: common liquids
First Published In: Dec-70, The Magazine of Fantasy and Science Fiction
  • 1972 The Left Hand of the Electron

Cold Water
Subject: freezing of water
First Published In: Feb-71, The Magazine of Fantasy and Science Fiction
  • 1972 The Left Hand of the Electron

Hot Water
Subject: boiling points
First Published In: Jan-71, The Magazine of Fantasy and Science Fiction
  • 1972 The Left Hand of the Electron


If interested, here's the book at I did a quick search and saw 114 hits for 'water'.

Leaderboard: "China is global leader in imprisoned journalists for a second consecutive year, watchdog group finds"

Are NBC, Bloomberg and the rest of the gang still making their obeisance to Beijing?

From the South China Morning Post, December 15:

  • China held at least 47 journalists in jail this year, according to the Committee to Protect Journalists, just shy of the 48 it had in prisons in 2019
    About half this year are Uygurs reporting on conditions in Xinjiang, a CPJ official says

學習編碼 / كودنى ئۆگىنىۋېلىڭ

Workers walking by the perimeter fence of what is officially known as a vocational skills education centre in Dabancheng in Xinjiang Uygur autonomous region. According to the Committee to Protect Journalists, about half the reporters in jail in China this year are Uygurs from the region. Photo: Reuters 

Workers walking by the perimeter fence of what is officially known as a vocational skills education centre in Dabancheng in Xinjiang Uygur autonomous region. According to the Committee to Protect Journalists, about half the reporters in jail in China this year are Uygurs from the region. Photo: Reuters 

China has topped the global ranking of imprisoned journalists for a second year in a row, according to new analysis by the Committee to Protect Journalists (CPJ), a press freedom watchdog.

At least 47 journalists were imprisoned in the country as of December 1, including those jailed this year as well as those serving longer sentences, according to a CPJ report published on Tuesday. Last year, that number was 48, according to CPJ, which is based in New York.....

I think the characters and script above the guard tower say "Learn to Code" in Mandarin and Uyghur.

Might be "Arbeit macht Frei" though 

My translators of Chinese return on Monday, before taking off for their second New Year celebration for the Lunar shindig and one of them, the Malaysian guy does the Deepavali - the Indian New Year, and Gawai in solidarity with the indigenous Dayak people on Borneo. There's something with the majority Malay Muslim population too but I think he does that just to go to the feast. Where was I?

Oh yes, journos getting locked up while one of China's foreign agents is filing the required paperwork. Keep in mind this is just one report from one registered agent:

72. During this 6 month reporting period, have you on behalf of any foreign principal engaged in political activity as defined below? If yes, identify each such foreign principal and describe in detail all such political activity, indicating, among other things,the relations, interests and policies sought to be influenced and the means employed to achieve this purpose. If the registrant arranged, sponsored or delivered speeches,lectures or radio and TV broadcasts, give details as to dates, places of delivery, names of speakers and subject matter.
The China-US Exchange Foundation: CUSEF, a non government non-profit entity based in Hong Kong, engages in promoting relations and facilitating exchanges between China and the United Sates. We shared information about the Foundation's work to various audiences and provided support for delegations visiting China. BLJ has also helped CUSEF to engage openly with academic and thought leaders, including through the use of salon style dinners. We also supported trips to China for the following media outlets: 
Boston Herald
Boston Globe
Huffington Post 
Embassy of The People's Republic of China to the United States: BU and the Embassy of China have endeavored to focus on the following key areas of work: 
1) media training;
2) media monitoring; 
3)social media; 
4)media relations;
5)message recasting; 
6)public diplomacy support; 
7) strategic communications guidance and support; 8)crisis communications and hot button issues; 
9) influencer relationship building and networking.

That's from this August 2020 FARA report:

If interested some of the bigger outlets are named as recipients of China's largess in:  (pages 11 and 12)

And here's one from 2017:

We also supported trips to China for the following media outlets


• Newsweek

• Los Angeles Times

• Baltimore Sun

• Chicago Tribune

• The Guardian

• The New Yorker

• The Financial Times

• Slate

• Foreign Policy

• The Philadelphia Inquirer

• New York Magazine

It's a damn travel agency.
And hundreds more.
As Axios said in June:
Well, yeah, when you're running the schmoozefest shuttle.

Re/Insurance, Cat Bonds: With Premiums Rising Blackstone Reenters the Biz

 Two from Artemis. First up, December 21:

ILS to go from strength to strength: Brad Adderley, Appleby

The twin, positive impacts of rising prices and much improved terms means that the hardening market environment isn’t going away anytime soon, suggesting ever-increasing success for the insurance-linked securities (ILS) space, according to Brad Adderley, senior partner in Appleby’s Bermuda office who has been involved in a significant number of ILS transactions.

Poised to surpass $16 billion for the very first time, annual catastrophe bond and related ILS issuance in 2020 is set to break numerous records.

Excluding a slight lull during the height of the Covid-19 pandemic earlier in the year, the catastrophe bond segment once again showed its resilience to financial market turmoil and volatility.

“Cat bonds are booming and I don’t think that’s going to be any different for next year,” said Adderley, in a recent interview with Artemis. “As it’s becoming more mainstream, people are getting more comfortable with it and, as more corporations like Alphabet (Google) enter the space, others look at that and think, ‘maybe this is something we need to consider.’”

Alphabet Inc., the parent of Google, sponsored its first catastrophe bond in November, a $237.5 million California earthquake transaction. Owing to the success of this placement, the company returned in December with an additional $95 million deal also covering earthquake risk in the State of California.

“The Alphabet and the Bayview transactions this year, which Appleby worked on, are all big deals because you see non-insurance entities, corporates, entering the space in a big way. It’s not like a $50 million deal, it’s $300 million and more. And, so, I think that creates its own natural following.

“People always said for cat bonds to grow we need new products. Well, although that’s nice, is it actually more to do with needing more sponsors and more deals? So, now that Google’s done it, what other large corporates are going to be thinking the same way?” continued Adderley....


And , December 28:

Nephila gets allocation from Blackstone multi-strategy fund

Nephila Capital, the largest dedicated manager of insurance and reinsurance linked securities, has been given an allocation for its sub-advisory role on one of giant asset manager Blackstone Group’s multi-strategy investment funds.

Nephila Capital has been a sub-advisor to the Blackstone Alternative Multi-Strategy Fund for a number of years, but hasn’t actually managed an allocation from the fund for some time.

Blackstone Alternative Asset Management, the hedge fund solutions group of Blackstone which has around $78 billion of investor assets under management, first added Nephila Capital as a sub-advisor to one of its multi-manager alternative investment funds back in 2013.

However, Blackstone reduced its allocation to reinsurance in its multi-manager portfolio’s back in late 2014, as it said that the risk/reward profile of the reinsurance and insurance-linked securities (ILS) space had been ‘significantly altered’ due to the strong capital inflows into the market.

For a number of years now, Nephila Capital has been listed as an inactive sub-advisor to the Blackstone multi-strategy and alternative focused investment fund, with no allocation mentioned in the fund filings as recently as in November.

But now, in a new filing made yesterday, the Blackstone Alternative Multi-Strategy Fund prospectus states that, “The Fund’s adviser, Blackstone Alternative Investment Advisors LLC, has allocated a portion of the Fund’s assets to an existing sub-adviser, Nephila Capital Ltd.”...


The Dunning-Kruger Effect Is Probably Not Real

 So all the folks pointing at others while somehow thinking they were exempt from not knowing how ignorant they were, were right? Or were they wrong?

I'm starting to get confused. I do know the true-believer members of the cult of Dunning-Kruger are not going to take this well.

From McGill University's Office of Science and Society:

The darling of those who wish to explain why incompetent people don’t know they’re unskilled, the Dunning-Kruger effect may actually just be a data artefact.

I want the Dunning-Kruger effect to be real. First described in a seminal 1999 paper by David Dunning and Justin Kruger, this effect has been the darling of journalists who want to explain why dumb people don’t know they’re dumb. There’s even video of a fantastic pastiche of Turandot’s famous aria, Nessun dorma, explaining the Dunning-Kruger effect. “They don’t know,” the opera singer belts out at the climax, “that they don’t know.”

I was planning on writing a very short article about the Dunning-Kruger effect and it felt like shooting fish in a barrel. Here’s the effect, how it was discovered, what it means. End of story.

But as I double-checked the academic literature, doubt started to creep in. While trying to understand the criticism that had been leveled at the original study, I fell down a rabbit hole, spoke to a few statistics-minded people, corresponded with Dr. Dunning himself, and tried to understand if our brain really was biased to overstate our competence in activities at which we suck... or if the celebrated effect was just a mirage brought about by the peculiar way in which we can play with numbers.

Have we been overstating our confidence in the Dunning-Kruger effect?

A misunderstood effect

The most important mistake people make about the Dunning-Kruger effect, according to Dr. Dunning, has to do with who falls victim to it. “The effect is about us, not them,” he wrote to me. “The lesson of the effect was always about how we should be humble and cautious about ourselves.” The Dunning-Kruger effect is not about dumb people. It’s mostly about all of us when it comes to things we are not very competent at.

In a nutshell, the Dunning-Kruger effect was originally defined as a bias in our thinking. If I am terrible at English grammar and am told to answer a quiz testing my knowledge of English grammar, this bias in my thinking would lead me, according to the theory, to believe I would get a higher score than I actually would. And if I excel at English grammar, the effect dictates I would be likely to slightly underestimate how well I would do. I might predict I would get a 70% score while my actual score would be 90%. But if my actual score was 15% (because I’m terrible at grammar), I might think more highly of myself and predict a score of 60%. This discrepancy is the effect, and it is thought to be due to a specific problem with our brain’s ability to assess its skills.

This is what student participants went through for Dunning and Kruger’s research project in the late 1990s. There were assessments of grammar, of humour, and of logical reasoning. Everyone was asked how well they thought they did and everyone was also graded objectively, and the two were compared.

Since then, many studies have been done that have reported this effect in other domains of knowledge. Dr. Dunning tells me he believes the effect “has more to do with being misinformed rather than uninformed.” If I am asked the boiling point of mercury, it is clear my brain does not hold the answer. But if I am asked what is the capital of Scotland, I may think I know enough to say Glasgow, but it turns out it’s Edinburgh. That’s misinformation and it’s pushing down on that confidence button in my brain.

So case closed, right? On the contrary. In 2016 and 2017, two papers were published in a mathematics journal called Numeracy. In them, the authors argued that the Dunning-Kruger effect was a mirage. And I tend to agree.

The effect is in the noise....


*Stratosphere warming watch* Strong signals now emerge for a disruptive stratospheric warming event in early January, possibly impacting the course of Winter

For moneymaking opportunities in natural gas the main effect to look for is descending cold air disrupting the polar vortex and changing the jet stream from a zonal pattern which contains the cold in the arctic to a meridional pattern which allows alternating tongues of cold and then warm air to pass over a given spot in the northern hemisphere. Here's a map of the two patterns from December last year:

The question, should the SSW occur, is does the cold air go to North America or Europe/Eurasia.  

Because the meridional pattern alternates warm/cold it is not a one-way bet but instead can set up a long-short-long sequence if 1) you get the correct area for the event and 2) you get the first trade right.

Very tricky in practice.

And from Severe Weather EU:

A warming event high up in the Stratosphere is looking likely to unfold at the start of the new year 2021. Stratospheric warming events in winter, are very important, as they can change the course of winter weather development and affect global circulation.

The “main actor” in these powerful events, is of course the Polar Vortex. It connects the bottom of the atmosphere (our weather) with the stratosphere above it. A strong exchange of energy between these two layers can shake the very foundations of the weather development across the Northern Hemisphere.


The atmosphere above us has many different layers. All of the clouds and the weather that we feel are found in the lowest part of the atmosphere called the troposphere. It reaches up to around 8 km (5 miles) altitude over the polar regions and up to around 14-16 km (9-10 miles) altitude over the tropics.

Above it, there is a different layer called the stratosphere. This layer is around 30 km thick and is very dry. Pressure values on top of the stratosphere (~52km altitude) are 1000-times lower than on the ground! Unlike in the troposphere, the temperature in the stratosphere increases with altitude. We can see the layers of the atmosphere on the image below, with the stratosphere in green hues, and the troposphere in blue at the bottom. The red line nicely shows the temperature progression with height above Earth.

Every year as we head into autumn, the north pole starts to cool. The solar input to the north pole decreases as the angle of incoming solar rays lowers. Eventually, the solar angle is so low, that no direct Sun rays can reach the north pole. That is known as the “polar night” when the Sun stays permanently below the horizon for a certain period....


Front (February) U.S. futures 2.463  +0.019

Tuesday, December 29, 2020

As Tropical Cyclone "Chalane" Hits Mozambique, ISIS Declares Moz To Be The New Caliphate and Threaten $20 Billion LNG Project

First up, From Africa Times:

Mozambique braces for Tropical Storm Chalane landfall

Mozambique is bracing for another tropical storm, one that’s expected to make an imminent landfall on Wednesday in or around Beira, a coastal city that bore the brunt of Cyclone Idai in 2019.

Tropical Storm Chalane is not expected to have the same catastrophic impacts as Idai, but it continued to strengthen as it approached in a favorable environment, especially while traveling over the warm waters of the Mozambique Channel.

The Instituto Nacional de Meteorología (INAM) in Mozambique has issued a high-level red alert for, among others, the Sofala Province communities that include Beira and Dondo, warning that the initial impacts would begin Tuesday night.

“The epicenter will pass through the district of Nhamatanda and on the afternoon of December 30, it will reach the province of Manica, entering through the district of Gondola, subsequently affecting the districts of Macate and Sussudenga,” the INAM agency said....MORE

And from the Gatestone Institute, December:

Mozambique Terrorist Group Poised to Establish an Islamic Emirate

  • Radical Muslims from Kenya and Tanzania are transforming what was initially a low-intensity ethnic rebellion, into a full-fledged Islamic jihad against Mozambique's central government.

  • Ansar al-Sunna, estimated to consist of about 20 cells operating throughout northeast Mozambique, is responsible for the murders of about 2,000 people, mostly civilians.

  • The terrorist group has driven approximately 200,000 people from their homes and burdened the majority Christian country's central government.

  • The Islamic State's Central African Province may have bigger plans for Mozambique's Ansar al-Sunna. If the terrorists are able to establish an Emirate under Sharia in Cabo Delgado Province, it could serve as a jihadi model, threatening the stability of other states in southern Africa. Malawi, Zimbabwe, South Africa, as well as Africa's Indian Ocean states of the Comoros and Madagascar, could be targeted.

Jihadists in northern Mozambique have intensified their military operations this year in an apparent attempt to establish an Islamic Emirate in the province of Cabo Delgado. The Islamist insurgency, which began in October 2017, remained below the radar until recently. The escalating violence, however, has become a security concern for Mozambique's regional neighbors, including South Africa, Uganda, Tanzania, Kenya and Somalia. Radical Muslims from Kenya and Tanzania are transforming what was initially a low-intensity ethnic rebellion, into a full-fledged Islamic jihad against Mozambique's central government....MUCH MORE

These are straight up psychopaths
From Deutsche-Welle last month:

Mozambique police: Islamists behead 50 people in troubled province

Finally, from Bloomberg, December 25:

Mozambique Troops Fight Off Attack Near $20 Billion LNG Project

Mozambique said its security forces repelled an attack by Islamist insurgents on a town close to the site where Total SE is building a $20 billion natural gas facility.

The attack took place about 21 kilometers (13 miles) from Total’s project overnight on Wednesday, according to a statement from the Ministry of Defense, and is the second this month on the town of Mute in the northern Cabo Delgado province. It accused the militants of trying to derail the investment.

Fighters who’ve aligned with Islamic State in August have already seized the port town of Mocimboa da Praia, about 42 kilometers south of Mute, raising the stakes in a conflict that’s killed about 2,500 people and caused 570,000 to flee their homes since it started three years ago....MORE

The country is really, really counting on the LNG for foreign currency and development.
Careful there, German investors.*

"EU batteries regulation aims to reduce reliance on China imports"

 From The Asset, December 30:

Europe wants to become a major player in sustainable battery production

he European Union is supporting its auto battery making industry with a package of regulations to enforce strict sustainability standards. On December 10 the European Commission proposed a new Batteries Regulation, which seeks to ensure that batteries in the EU market are sustainable and safe throughout their life cycle.

The EU has plans to establish itself as a major global player in battery production. This will not only bring benefits in terms of jobs and economic growth, but will also help achieve “strategic autonomy", notably reducing dependence on imports from China.

The proposed regulation is described as "the single most important tool that enables Europe to build a truly sustainable battery industry supporting Europe’s transition to electrification". It will now move through the legislative process, with amendments proposed until an eventual vote in the EU Parliament.

Under the regulation, batteries will be collected, repurposed and recycled, becoming a true source of valuable raw materials. For this, the proposal establishes specific requirements at each stage of the battery value chain.

All steps throughout the batteries' life cycle, from the extraction of mineral resources used in their manufacture up to their collection and treatment after use, are covered. 

The legislation will also provide legal certainty that will help unlock large-scale investments and boost production capacity for innovative and sustainable batteries in Europe and beyond to respond to the fast-growing market....


Might have to dust off the Umicore file, eh what. 

Big Money: "Ørsted brings in new investors for Greater Changhua wind farm"

I mentioned last week that we seem to have a story on Ørsted drop out of a terminal or feedreader every other day. And not tiny deals.

From Splash 24/7:

Denmark-headquartered green energy giant Ørsted has signed agreements with a consortium comprising institutional investor Caisse de dépôt et placement du Québec (CDPQ) and Taiwanese private equity fund Cathay PE to sell a 50% ownership share of its Greater Changhua 1 Offshore Wind Farm.

Ørsted is currently constructing the Greater Changhua 1 site and the project is expected to be completed in 2022.

“I’m delighted to welcome our long-term partner CDPQ and Cathay PE in Greater Changhua 1. It’s encouraging to once again see institutional investors playing an important role in the transition to renewable energy and low-emission economies....


The Caisse runs about 260 billion USD but they prefer to quote in Loonies, $333 billion CAD.

Here's more at Le Journal de Montréal:

Énergie renouvelable: la Caisse de dépôt et placement du Québec mise gros sur l’éolien à Taïwan

"Floating 'Mini-Nukes' Could Power Countries by 2025"

From The Guardian, December 17:

Danish company plans to fit ships with small nuclear reactors to send energy to developing countries

Floating barges fitted with advanced nuclear reactors could begin powering developing nations by the mid-2020s, according to a Danish startup company.

Seaborg Technologies believes it can make cheap nuclear electricity a viable alternative to fossil fuels across the developing world as soon as 2025.

Its seaborne “mini-nukes” have been designed for countries that lack the energy grid infrastructure to develop utility-scale renewable energy projects, many of which go on to use gas, diesel and coal plants instead.

The ships are fitted with one or more small nuclear reactors, which can generate electricity and transmit the power to the mainland. The first ship of this kind began supplying heat and electricity to the Russian port of Pevek on the East Siberian Sea in December 2019.

Troels Schönfeldt, the chief executive of Seaborg, said the company’s 100-megawatt compact molten salt reactor would take two years to build and would generate electricity that would be cheaper than coal-fired power.

Seaborg has raised about €20m (£18.3m) from private investors, including the Danish retail billionaire Anders Holch Povlsen, and received the first of the necessary regulatory approvals within a four-phase process from the American Bureau of Shipping this week....


"Floating nuclear power plant leaves Murmansk for Russia’s eastern Arctic"

"Russia’s first sea-borne nuclear power plant arrives at its Arctic base"

Russia's New Floating Nuke Power Plant Begins Delivering Electricity

"ESG Causes Pension Strategies to Underperform"

One of the points we've attempted to make over the years is that when you run into a RIA or fund manager who advocates both passive index investing and ESG they are more than likely just another Wall Street marketeer. ESG is by definition active.

From ValueWalk, December 25:

Pension investment strategies have been coming up short for years as most states watch their unfunded liabilities grow. One study shows that actively managed public pensions have been underperforming passive index funds, which further demonstrates everything that’s wrong with most pension investment strategies.

A new study looks at the best and worst-performing state pensions and their investment strategies compared to passive funds.

Pensions would do better if invested in passive funds

In a study published in August 2019, the Institute for Pension Fund Integrity reported that just five of the 52 pension funds it analyzed outperformed their 60/40 passive index investment portfolio. Only one state had both strong pension performance and was well funded.

The institute used the Vanguard Total Stock Market Index and the Vanguard Total Bond Market Index to build two passive index portfolios to compare state pensions to. One of the portfolios was 60% stocks and 40% bonds, while the other was 50% stocks and 50% bonds.

Now in a newer study, the Institute for Pension Fund Integrity looked at the investment strategies of the top and bottom performing funds compared to the passive portfolios it had created.

Differences between the best and worst pensions

Interestingly, asset allocation didn't differ drastically among the top and bottom performing funds, which means other aspects are causing problems for the worst funds. The IPFI said global and domestic equity was on average the biggest part of pensions' portfolios. The distribution of those assets among the top and bottom five funds was almost identical.

South Dakota consistently outperformed pensions in other states, both against the 60/40 passive fund strategy and in its funding ratio. According to the IPFI, the state's "commendable prioritization of benchmarks and fiduciary responsibilities exemplify the values of a successful pension."....


Even worse than the duplicity of the RIA's is the fact that the public union pension plans have explicit taxpayer responsibility to make up any shortfall when the activist pension fund (looking at you, CalPERS) falls short of their mandatory return levels.

It's one thing to virtue signal with your own money but to do it with the taxpayer's money is perverse and perverted.

Another point we've been making for a while. Because there are so few actual "E" stocks, portfolios end up being stuffed with the more nebulous "S and G" stocks.

This means you end up with a lot of Google "carbon neutral since 2007" and other tech stocks.

Fine and dandy when the market is manic for tech but a guaranteed relative, if not absolute, loser if, as seems possible right now the herd moves on to Emerging, or Value or Small Cap or any factor other than large-cap growth.

Finally, solely as an example of the above, here are the largest holdings of the $2.62 billion Vanguard ESG U.S. Stock ETF (ESGV)

Top 10 Holdings (26.36% of Total Assets)

NameSymbol% Assets
Apple IncAAPL6.29%
Microsoft CorpMSFT5.25% IncAMZN4.39%
Facebook Inc AFB2.18%
Alphabet Inc Class CGOOG2.03%
Alphabet Inc AGOOGL1.41%
Tesla IncTSLA1.37%
JPMorgan Chase & CoJPM1.17%
Visa Inc Class AV1.16%
Procter & Gamble CoPG1.11%

St. Louis Fed: Food Prices As An Indicator Of Future Inflation

An interesting commentary, especially in light of the generations of Econ profs admonishing against putting much weight on headline inflation, as food and energy prices are volatile and should be stripped out to reveal core CPI and PPI trends.

From the Federal Reserve Bank of St. Louis, January 1, 2002:

Predicting Inflation: Food For Thought

"When I was your age, I walked 20 miles uphill in the snow to get to school and a gallon of milk only cost a nickel."Who doesn't remember grandparents and relatives sharing similar stories with us at family get-togethers? Today, a gallon of milk at the grocery store will cost more than a nickel, as will other goods that our grandparents paid considerably less for in their day. The overall rise in prices is known to economists as inflation.

Over the long run, inflation is caused by too much growth in the money supply. Monetary inflation is bad because it obscures the price signals that make our market system work efficiently. The job of monetary policy is to supply just the right amount of money so that the average price level remains stable.

Over short periods, however, inflation can be influenced by large changes in the market for particular goods and services. Because these bouts of inflation tend to be short-lived and self-correcting, the proper monetary policy response is to ignore them. The problem for the Federal Reserve is to know when inflation is due to excessive monetary growth (requiring a policy response) and when it is due to transitory market fluctuations. To sort out the short-run real effects caused by disruptions to particular markets from the long-run monetary effects caused by Federal Reserve policy, economists have developed techniques to filter the inflation news. Traditionally, economists have excluded food and energy prices in their filtering process, but we find that by filtering out food prices, we might be losing valuable information about inflation.

What's in the Basket?

Economists looking at inflation generally track a price index, which is the average price of a consistent "basket" of consumer goods. The two major price indexes are the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCEPI).

The CPI, reported by the Bureau of Labor Statistics, was created for the specific purpose of adjusting veterans' pension benefits for inflation following WWI, while the PCEPI, reported by the Bureau of Economic Analysis, is used to compute the nation's Gross Domestic Product. Both indexes measure the rate of inflation faced by consumers, but the PCEPI is more comprehensive.

Approximately 25 percent of the items in the PCEPI basket are excluded from the CPI basket. A guiding principle for deciding whether an item belongs in the CPI basket is whether it is paid for "out of pocket." The main items in the PCEPI that are not included in the CPI are things that consumers get but don't pay for out of pocket, such as free checking, employer-funded medical care and medical services paid through Medicare and Medicaid. Also, the CPI is an index of inflation for urban dwellers; so, it excludes spending by rural households.

The PCEPI, then, is a larger and broader index that includes a more varied bundle of goods than the CPI does. Although both are valid for gauging inflation, in 2000 the Federal Reserve began reporting its inflation forecasts in terms of the PCEPI instead of the CPI. Because of the PCEPI's wider basket of goods and the Fed's focus on it, we'll look only at the PCEPI, although our conclusions also apply to the CPI.1

When tracking inflation, people monitor data releases to predict the underlying inflation trend, which is driven solely by monetary policy. However, information about the inflation trend has been compared to a radio signal that is obscured by static. Just as noise filters are used to remove the static in radio signals, economists filter inflation data to remove the static caused by supply and demand changes. One way to filter the inflation news is to measure the change in prices over a long period, such as a year, to eliminate the short-run fluctuations. But then, the useful information is delayed for a year.

Another way that economists filter out the static is to delete the items in the price index that are sensitive to large, frequent disturbances to supply and demand and, therefore, have highly volatile prices. After deleting these items, what is left is core inflation, that is, inflation in the basket of goods excluding the more volatile components. Since the 1970s, core inflation has typically been measured by excluding food and energy from the basket of goods. This is because the early 1970s saw highly volatile food prices and, soon afterward, a rapid rise in the prices of gas, oil and other energy products.

The core measure of inflation, the PCEPI excluding food and energy, has been less sensitive to temporary shocks to the economy and has seemed to have been a better barometer of the underlying trend in inflation than the all-item PCEPI. Looking at Figure 1, we see that the rate of inflation measured by the PCEPI excluding food and energy has been less volatile than with the all-item index. During times of high inflation, such as the mid-1970s and early 1980s, the PCEPI excluding food and energy did not increase nearly as much as the all-item PCEPI.When inflation dropped considerably in the middle of 1986, the index excluding food and energy did not show the same massive drop.

Let's take a closer look at the changes in the prices of components excluded from the core: food and energy. From Figure 2, we see that inflation in energy prices indeed has been very volatile, increasing and decreasing much more than the food component or the all-item PCEPI. We also see that food prices have become increasingly stable recently, while energy prices continue to fluctuate significantly.

What has caused the recent increase in the stability of food prices? Improvements in technology and a change in consumer eating habits have both contributed.2 Major advancements in the food distribution system have led to shorter lag times between picking produce at the farm and getting it into the hands of urban consumers. It is not unusual, as it once was, for a shopper in a supermarket in Chicago to be buying fresh produce grown in South America. As technological advances have reduced the cost of air freight and refrigeration, their use has become widespread and commonplace in the food industry, increasing the geographic size of the market for food and reducing the volatility of food prices.

Another change in the food distribution system is that many more people now buy their food from large grocery store chains. These large chains have an advantage over smaller specialty retailers in that they have the ability to stock larger quantities of many more different types of items. Large supermarkets purchase food directly from the producers in huge quantities, cutting the cost to themselves and their consumers.

Eating habits of the American consumer also have changed. With the hectic schedule many Americans have, people are less inclined to buy fresh fruit, vegetables, meat and poultry that may go bad in their refrigerators or require time and energy to prepare. People are much more likely to buy prepared meals at the grocery store or to eat at restaurants. The prices that consumers pay for these meals are largely expenditures on the labor used to prepare and serve the food. The price of these labor services is less volatile than is the price of the raw food products.

Should We Put Food Back into the "Core" Basket?

Because volatility in food prices has dropped in recent years, does it still make sense to exclude food from our measure of core inflation? Are we losing information about the underlying trend in inflation by removing such a stable component from the core? Indeed, by excluding food prices in our traditional analysis of core inflation, we lose more knowledge about the trend in inflation than we gain....


HT: ZeroHedge