Bloomberg does AB testing

Fascinating AB testing observed on the entire world’s population by major news networks. 

Barely 72 hours after the announcement of phase 1 trade deal, its accompanying mass euphoria and surge in world markets, the almost same exact photo with some slight changes in copyrighting and background color is released into production. 

It will be fascinating to observe the world’s reaction to this new AB year variant that just got released and the corresponding market price levels. 

An unchanging constant as the source of trust

Trust is the ultimate source of wealth in any society. The level of manifested physical wealth correlates positively with the level of perceived trust members of society have for an entity.

When an entity, be it a phenomena or a behavior, is observed to be consistent across time without much falter, it soon becomes accepted as the norm. Overtime this norm gets deeply embedded within a society and becomes an integral part of its culture. It thus becomes trusted and a source of credibility.

Societal commerce is built on trust. Trust accumulated through consistency overtime can be converted to other forms of tangible currency. These currencies can then be used to direct resources within the society towards the achievement of very material goals.

When comparing between two entities that are embedded within the cultural fabric of society, the one that exhibits a higher level of consistency inevitably gains more trust. This explains why while fiat currencies comes and goes, the value of gold remains consistent across time.

While it might be tempting to equate trust with value, there is a subtle difference. While trust elicits value, value need not necessarily elicit trust.

Expressing the entire civilization’s undertaking at any point in time as an linear equation, any essential variable that happens to be the most restrictive in supply at that point inevitably becomes the most valued. However wide fluctuations in value does not elicit trust in the long run.

Sources of trust

  • the rotation of seasons and our subsequent practice of agriculture
  • the constant speed of light and it’s use in Einstein’s theory of relativity
  • gold with its scarcity and it’s persist use as a store of wealth
  • well run institutions with well defined constitutions
  • fiat currencies with under sound government regimes
  • individuals who exhibit consistent behavior overtime

Qualities of viable currencies

  • Ability to be divisible
  • Ability to be moved
  • Ability as a store of wealth overtime
    • consistent levels of supply
    • scarcity

Functions of currencies

  • a means to facilitate transactions
  • a store of wealth

Examples of trust erosion

Example 1: Michigan Pulls $600 Million From Ken Fisher an individual After Lewd Remarks

https://www.bloomberg.com/news/articles/2019-10-12/michigan-pulls-600-million-from-ken-fisher-after-lewd-remarks

Example 2: 1918 Germany as an institution, towards the tail end of WWI.

When it became evident that the country will loss the war, it experienced increased inability to raise debt to in domestic currency denomination to continue financing its war efforts. It’s currency soon lost it’s reserve currency status and it was increasingly forced to denominate debt in foreign reserve currencies.

Post WWI debts denominated in domestic currency where inflated away through printing of cash by the  German government to pay of debts denominated in foreign currencies.

Example 3: Africa use of glass beads as a failed form of currency

Europe was able to cheaply produce this in abundance . Europeans for a period were able to exploit this asymmetry by exchanging cheap glass beads for valuable natural resources. When value within the African society became depleted,  Europeans were eventually able to subjugate the entire African population and exploit them through the slave trade.

Example 4: Wall Street crash and the Great Depression of the 1930s.

Bankers increasingly became concern of easy credit driving share prices to stratospheric valuations. An eventual tightening of credit lead to rapid deleveraging within the system. The lack of trust within the system prevented the circulation of money and credit. The central bank ultimately had to step in to restore trust.

It did so by first preventing the flight to value. This was achieved through the banning of conversion of USD dollar to gold.

Example 5: An ongoing slow erosion of fiat money

With the deliberate pursuit of constant 2% yearly inflation by central banks around the world current fiat money are failed stores of wealth .

The currency of the Roman Empire is a perfect example of where we will be headed. Overtime less gold per coin is used. Their currency was ultimately replaced by paper which allowed rampant printing by the government during times of war. The effects of inflation eroded the Roman empires currency as a long term store of wealth.

Examples of persistent sources of trust

  • The institution of the Catholic Church
  • The consistent adherence to a set of sound principles by Berkshire Hathaway’s reinsurance business over multiple decades. 
  • Federal reserves consistent adherence to the dual mandate of 2% inflation and low unemployment rates

Conclusion

To build trust is to build wealth. The key to doing so is to adhere and operate on a consistent set of sound principles over across time and in all environments. Being slow and steady is a pre-requisite of this process.

Related readings

Observations on how public opinion is shaped in the US

Public opinion is observed to be very malleable and fickle. It’s highly susceptible to reshaping by main stream media.

In an unlikely twist of events, what was once presented as a war by the White House against China over trade and national security has overnight morphed to become a fight for American values like democracy, free speech and human rights.

While the ongoing unrest in Hong Kong have provided ample fuel, the tweet by NBA Houston Rockets general manager was the spark that caused the fire.

Related Readings

Fluid dynamics within the markets

Approximately 10% of all companies listed on Nasdaq and NYSE fell by more than 10% over the past week. Its like a magnitude 5 earthquake happened and the entire market goes into panic mode.

During this occasion, it is fascinating to observe at a macro level the flow of money within the system.

Sources of liquidity

  • the white house administration has cut taxes over the past 2 fiscal years between 2017 and 2018.
  • the Federal reserve increase money supply through the repo market and by lowering interest rates
  • Central banks around the world lower interest rates
  • the high US dollar signals that money from around the world is flowing into the US market

High pressure areas

  • the price of gold moves steadily upwards
  • the price of US Treasury bonds signaled by the fall in US Treasury yield moves steadily upwards
  • the SnP hovers near all time high
  • Companies classified as value stocks are trading at all time high multiples

Anomalous vacuum

  • Companies classified as growth stocks are trading at huge discounts versus all time highs

Once the psychological impact of the current set of stimulus wears off and assuming the supply of money stays constant within the US market, it is very likely money will start flowing from high pressure areas to fill up the anomalous vacuum described above.

https://trends.getdata.io

Evening out watching Rambo, last blood

From Sujit on trading

  • not necessary to get numbers further back than six months
  • stock market subjected to fractal distribution
  • it is possible to generate returns of up to 140% per year by trading on stocks that are moving within a range
  • going all in on each position each time leads to a very low Sharpe ratio
  • Sharpe ratio should be calculated separately for method and for SnP benchmarked against US treasury interest rates. The difference is the actual returns

On Rambo Last blood

A movie is a reflection of the culture and attitude of an age. Rambo was a very popular cultural icon during the eighties and the early nineties when memories of the Second World War and the Cold War against the communist were still very fresh in the minds of the people in America.

If you looked at the world today through the eyes of someone like Rambo, you would have been able to easily draw facts to back the narrative painted by Trump prior to being elected president.

When operating in an environment of uncertainty, a decision maker formulates multiple often competing narratives in the head that best explains majority of the facts presented. He calibrates the weightage assigned to the probability of each narrative as new pieces of data become available. He simultaneously utilizes multiple ones that are assigned high plausibility in his decision making to strive for the best possible expected outcome . It is a cognitively demanding iterative activity that goes on indefinitely.

  • common themes between movie and Trump’s narrative
    • Mexico drug cartels
    • Mexico prostitution rings
    • The world is a dark place
    • illegal border crossing
    • poor border fence
    • white male
    • Rust belt
    • Protagonist is in his 70s
    • Freedom fighter who fought the communist in Vietnam and Russia
    • guns and lots of blood
    • man of steel
    • manifest destiny
  • Cognitive biases
    • Narrative fallacy
    • Framing bias
    • selective bias

Related readings

  • Expert political judgement, Philip Tetlock

Patagonia’s brilliantly executed brand positioning

This company has moved beyond selling physical products and lifestyles into the business of selling an identity.

The persona

I am youthful and vibrant, I am passionate about the great outdoors and I will fight to preserve the environment which I so much love.

My thoughts

Nowhere within this 100 page magazine was there ever a mention that Patagonia sells outdoor gears but if you identify with the persona just described above then Patagonia is your go to brand.

The company has positioned its brand at the self actualization level of the Maslow’s hierarchy of needs.

Book summary: Barbarians at the gate by Bryan Burrough and John Helyar

This book documents the series of events leading up to the successful leverage buyout (LBO) of RJR Nabisco.

Mechanism of an LBO exercise

  • Figure out the cheapest possible price to acquire the asset and its future cashflows while keeping transaction costs low
  • The acquisition team access the business to decipher potential cashflow, areas for cost savings and parts that could be sold off
  • The acquisition team raises private money to do the acquisition
  • During this period of time bandwidth of law firms and banks are fully engaged
  • Competing offers should be expected once a public announcement of an LBO buyout is made
  • Law firms and investment banks will charge fees even if the hiring party does not win the bid

Methods for financing an LBO exercise

  • issue of junk bonds
  • raising from private investors
  • issue of shares to directors to drive down level of cash required for the purchase
  • payment through cash
  • utilization of legal loop holes to reduce taxation on the LBO transaction

Motivations for an LBO exercise

  • The management team:
    • a option to exercise when the market is persistently undervaluing the shares of the business
    • free up value to reward themselves and their share holders
    • the CEO being the typical Type A personality got bored and restless from running his day to day business
  • The investment banks:
    • when the market is down but they still need to figure out ways to make money through business transactions
    • some needed an opportunity to enhance their prestige so as to attract future opportunities. Securing a prominent position in the transaction has that effect

Lessons from the LBO exercise

  • The inability to sit in a room and doing nothing is the source of most trouble.
    • The CEO ended off worst off than he did before the LBO event
  • Having inside support matters
    • Having support of the management team provides knowledge of where cost savings could be had in the operations
  • Just when you think shit will not happen, it usually does.
    • The management team was expecting an uneventful transaction. Unfortunately, the operation quickly escalated out of control when competing bids surfaced.
  • When money is cheap, Wall street gets creative
    • the Federal reserve provides cheap money which cannot be put to real economic use, LBO is just another method Wall Street utilizes to make a profit from this cheap money
  • When egos start getting involved, its no longer about making a profit
    • the successful acquirer ended up defaulting on a lot of the junk bonds issue
    • what started as an initial USD76/share bid quickly escalated to USD106/share
  • When an opportunity as large as this becomes available, the services of lawyer firms and bank credit becomes scarce and it is hard to gain access to such facilities as a new comer to the table
  • Companies actively manage Wall Street expectation
    • RJR Nabisco actively engaged in wasteful activities to project a steadily advancing year over year profitability and thus share price. It could have operated efficiently and have the share price reflect the actual value on day one
  • The core business will falter overtime when the operators get distracted by other activities and are no longer engaged and connoisseur of their own products
    • early employees of Reynolds cigarettes are themselves enthusiast smokers. They released a new product only when it passes their own taste test
    • later management were focused on milking the cash cow and started changing the culture as such
  • Negotiation dynamics
    • the senior financiers will generally play the diplomat (good cop)
    • the junior and middle level financiers will be in charge of hashing out the details (bad cop)

 

Insights from evening with Wine and Jam session with Adriene and Dennis, Birthday party with Konstantine

From Tommaso on Machine Learning – Economics

  • Study was done on Italy
  • Voting patterns can be leading indicators for credit spread
  • When a political party is stable, Eigen distance between votes of party members will cluster together, even for bills that are not critical for parties
  • When a political party becomes unstable, the Eigen distance between vote on non-critical bills by party members will increase
  • Alignment will increase before a wild swing to misalignment
    • periods of high alignment leads to very tight credit spread
    • tight credit spread indicates a very high price for bond
  • Misalignment will decrease before consolidation towards alignment
    • periods of low alignment leads to very wide credit spread
    • wide credit spread indicates a very low price for bond
  • proposed strategy:
    • when alignments increase, short bonds in anticipation for forthcoming misalignment
    • when misalignments increase, long bonds in anticipation for forthcoming alignment

From Tommaso on Machine Learning – Micro-biology

  • Started studying how presence specific bacteria affects health at an aggregate level
  • Studying ancestral tree of bacterias help estimate the distribution of bacteria in the gut of different individuals

On sales

  • Mormons are one of the best sales people due to their coming to age ritual.
  • They typically will get rejected many many times during their passing through rite

On human cyborgs

  • Neil Harbisson is an artist who is color blind, he implanted a device into his brain which allows him to see colors

On hardware and biotech with Andrew

  • To design printed circuit board install IDE which allows easy assembly, simulation and coding – DesignSpark
  • Firmware for micro-processors are written in C. Firmware controls where signals are past to when incoming signals are received
  • Micro-processors are installed on circuit board
  • Can be printed in China and shipped over in 5 days – PCBWay
  • BioCurious and another biotech hacker space up in Berkeley have managed to train yeast to product cocaine and THC

Related readings

Insights from lunch with Andrew and Paul

On trading

  • learn to read technical charts
  • price and volume reflects all necessary sentiment and information
  • Read the charts in different time frames with gives a sense of various impacts have on pricing trends
  • news happen after the fact which drives emotions like fear. When the brain is overcame by fear irrational behavior results.
  • charts remove the emotional component

On news and propaganda

  • All news are forms of propaganda best avoided or taken with a pinch of salt.
  • It is hard to trace much major change in life to any specific news occurrence
  • news is less about facts but more a reflection of the reader’s attitudes and belief toward the subject receiving coverage
  • how is it that US news sites are able to report on a country like North Korea where no information is available externally? Are the gaps mainly filled in by US propaganda

On education

  • its hard to be an educator in the US.
  • There is too much regulation
  • Students are not as motivated compared to students in other countries

On the environment

  • Three hundred chemical components are found in donated blood that are not supposed to be there
  • climate change is a major concern
  • capitalism driven consumerism is not sustainable

Related readings

  • Slow death by the rubber duck