Archive for 2008

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Stock Market Crashes

Saturday, November 1st, 2008

Many people seem to be reacting to the recent stock market crash the way they wish they had to the 1987 crash, and a smaller number are comparing it to 1929.
The unusual resemblance to the crash of 1937 makes me expect something in between those two scenarios.

  • The 1937 crash was caused in part by a sudden increase in caution by banks after the Fed significantly increased their reserve requirement. Banks played no interesting role in the 1929 or 1987 crashes.
  • The 1929 and 1987 crashes followed stock market peaks in August, versus March and the prior October for the 1937 and 2008 crashes.
  • The 1937 and 2008 crashes both came eight years after one of history’s largest stock market bubbles.
  • The 1929 and 1987 crashes followed an increase in the discount rate to 6 percent. The 1937 and 2008 crashes followed decreases in the discount rate to 1 and 2.25 percent.

All four crashes happened mainly in October and their behavior in that month provides little reason for distinguishing them.
If the 1937 crash is a good model for what to expect in our near future, many investors who are currently following the lesson they learned from the 1987 crash will discover in early 2009 that the unexpectedly severe recession casts doubt on the belief that crashes create good buying opportunities. How many of them will stick to their buy and hold commitment then (when I expect it will be a good idea)?
When the extent of the recession becomes disturbing, remember Brad DeLong’s perspective:

Is 2008 Our 1929? No. It is not. The most important reason it is not is that Bernanke and Paulson are both focused like laser beams on not making the same mistakes as were made in 1929….
They want to make their own, original, mistakes..

(HT James Hamilton).

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Posted in Investing | 2 Comments »

Automated Market Maker Problems

Sunday, October 26th, 2008

Last night an Intrade trader found and exploited a bug in my Automated Market Maker, manipulating DEM.PRES-TROOPS.IRAQ until Intrade rejected one of the market maker’s orders for lack of credit and the software shut down.
The bug involves handling of partial executions of orders, and doesn’t appear to be easily fixable (what happened looks nearly identical to the scenarios I had analyzed and thought I had guarded against).
For the moment, I’ve reduced the market maker’s order size to one contract, which will prevent further exploitation but provide much less liquidity.
I will try to fix the bug sometime in November and increase the order size (on the contracts that don’t get expired at election time) by as much as I can without adding more money to the market maker’s account. I will also analyze the information provided by the markets shortly after the election.

Posted in Idea Futures | 3 Comments »

None of the above for president

Tuesday, October 21st, 2008

I had been half-heartedly planning the past few months to vote for Libertarian presidential candidate Bob Barr. I had previously considered voting for Obama when it looked like he would make an important difference in the Iraq war, but it now looks like the Iraqi government will persuade the U.S. to leave soon enough for that difference not to matter. If I lived in a swing state and the election was close, I might persuade myself that Obama’s personality and intelligence make him more qualified, but my track record for evaluating politicians that way is sufficiently unimpressive that I ought to be uncertain whether I’ve been fooled by his eloquence.
Voting Libertarian is normally the best way to encourage whoever wins to adopt a better policy, but this time it’s unclear whether that would send the message “I want more unprincipled opportunists”. Barr’s past support for the war on some drugs and his current mixed opinions on that subject are damaging the Libertarian party’s reputation.
The final straw that has convinced me not to vote for him is in this New Yorker piece:

For Barr, the terrorist attacks of September 11, 2001, and the subsequent expansion of executive power under President Bush, were a political turning point. “I went through Reagan National after 9/11, and saw guardsmen with automatic weapons,” he told me. “It dawned on me that we’ve entered a whole new world. It may have made other passengers feel more secure, but it made me feel dramatically less free.”

An NRA director saying the presence of armed men is a threat to freedom? There’s no shortage of dishonest pretenses of security that directly interfere with the average passenger. I haven’t heard any indication that armed guardsmen in airports do anything to innocent people. I saw more armed soldiers in the Zurich airport in the late 1980s than I saw in U.S. airports, and I’m fairly sure they didn’t erode Swiss freedom.
This is sufficiently bizarre as to suggest he can’t keep track of which ideology he believes today.
Not to mention this older report where he seems to specifically say Reagan National should have armed guardsmen.

Posted in U.S. Politics | No Comments »

Seasteading08

Tuesday, October 14th, 2008

The first Seasteading conference went rather well. It got a good turnout of intelligent people, in spite of being on a weekday (they didn’t plan far enough ahead to find a good weekend spot).
I was somewhat disappointed by the time spent on the basic motivations behind seasteading (do people come to this kind of conference without understanding the motivations?), and I wanted to focus more on a serious analysis of how close the business plans are to being a good investment.
One interesting idea that was briefly mentioned is unmanned farms, herded by small robotic boats. If you’re willing to lose farms to an occasional storm, that drastically cuts costs. But when I imagine the cheapest possible farms, it seems the plants would get significant salt spray, which drastically limits the types of crops which will thrive.
The most interesting subject was Ephemerisle. Before the conference I had been wondering whether it would be interesting enough that I would want to attend. The conference convinced me that it will attract the kind of people I like, and that there will be some interesting technical challenges. Since my very rusty knowledge of sailing seems to leave me better informed than most seasteaders about some of those challenges, I will want to provide some help with the planning. It’s still too poorly thought out for me to feel confident that it will be done safely, but it can probably be planned well enough to be safe under most conditions (and hopefully people will be prepared to cancel it if unusual winds make it look unsafe).
The location seems very uncertain, and will have some important impacts on the risks. During the conference, the tentative plan seemed to be a few miles of the southern California coast, but afterward I got some indications that the plan had changed to the San Francisco bay, which would be a good deal easier but which would do less to promote any long-term vision.

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Posted in Freedom | No Comments »

Misbehavior of Markets

Sunday, October 5th, 2008

Book review: The Misbehavior of Markets: A Fractal View of Risk, Ruin & Reward by Benoit Mandelbrot.
Mandelbrot describes some problems with financial models that are designed to provide approximations of things that can’t be perfectly modeled. He pretends that pointing out the dangers of relying too much on imperfect approximations shows some brilliant insight. But mostly he’s just translating ideas that are understood by many experts into language that can be understood by laymen who are unlikely to get much value out of studying those ideas.
His list of “ten heresies” is arrogantly misnamed. Sure, there are some prestigious people whose overconfidence in financial models leads them to beliefs that are different from his “heresies”, but those “heresies” are closer to orthodoxies than they are to heresies.
His denial of the equity premium puzzle is fairly heretical, but his argument there is fairly cryptic, and relies on suspicious and poorly specified claims about risk.
He says market timing works, but the strategy he vaguely hints at requires faster reaction times than are likely to be achieved by the kind of investor this book seems aimed at.
His use of fractals doesn’t have any apparent value.
Mandelbrot is primarily a mathematician with limited interest in understanding how markets work. One clear example is his mention of a time when Magellan “was still a small fund, too small for any detractors to argue that its size alone gave it a competitive edge”. Any informed person should know that’s completely backward – larger funds have a clear disadvantage because they are limited to trading the most liquid investments.
Another example of a careless mistake is when he claims the evidence suggests basketball players have hot streaks, seemingly unaware that Tversky and others have largely debunked that idea.

Posted in Book Reviews, Investing | No Comments »

Wall Street vs Intrade

Monday, September 29th, 2008

The stock market reacted to today’s defeat of the bank bailout bill with an unusually big decline. Yet the news wasn’t much of a surprise to people watching Intrade, whose contract BAILOUT.APPROVE.SEP08 was trading around 20% all morning. Why did the stock market act as if it was a big surprise?
Did Intrade traders make a lucky guess not based on adequate evidence? Did they have evidence that the stock market ignored? Could the stock market have priced in an 80% chance of the bill being defeated (if so, that would seem to imply that passage would have caused the biggest one-day rise in history)? Could the stock market have been reacting to other news which just happened to coincide with the House vote? (It looks like the market had a short-lived jump coinciding with news that House leaders hoped to twist enough arms to reverse the vote, but I wasn’t able to watch the timing carefully because I was at the dentist).

It seems like one of these must be true, but each once seems improbable.

Arnold Kling, whose comments on the bailout have been better than most, was surprised that the bill failed.

I covered a few of my S&P 500 futures short positions at near the end of trading, but I’m still positioned quite cautiously (I made a small profit today).

Posted in Idea Futures, Investing | No Comments »

Global Catastrophic Risks

Thursday, September 25th, 2008

Book review: Global Catastrophic Risks by Nick Bostrom, and Milan Cirkovic.
This is a relatively comprehensive collection of thoughtful essays about the risks of a major catastrophe (mainly those that would kill a billion or more people).
Probably the most important chapter is the one on risks associated with AI, since few people attempting to create an AI seem to understand the possibilities it describes. It makes some implausible claims about the speed with which an AI could take over the world, but the argument they are used to support only requires that a first-mover advantage be important, and that is only weakly dependent on assumptions about that speed with which AI will improve.
The risks of a large fraction of humanity being killed by a super-volcano is apparently higher than the risk from asteroids, but volcanoes have more of a limit on their maximum size, so they appear to pose less risk of human extinction.
The risks of asteroids and comets can’t be handled as well as I thought by early detection, because some dark comets can’t be detected with current technology until it’s way too late. It seems we ought to start thinking about better detection systems, which would probably require large improvements in the cost-effectiveness of space-based telescopes or other sensors.
Many of the volcano and asteroid deaths would be due to crop failures from cold weather. Since mid-ocean temperatures are more stable that land temperatures, ocean based aquaculture would help mitigate this risk.
The climate change chapter seems much more objective and credible than what I’ve previously read on the subject, but is technical enough that it won’t be widely read, and it won’t satisfy anyone who is looking for arguments to justify their favorite policy. The best part is a list of possible instabilities which appear unlikely but which aren’t understood well enough to evaluate with any confidence.
The chapter on plagues mentions one surprising risk – better sanitation made polio more dangerous by altering the age at which it infected people. If I’d written the chapter, I’d have mentioned Ewald’s analysis of how human behavior influences the evolution of strains which are more or less virulent.
There’s good news about nuclear proliferation which has been under-reported – a fair number of countries have abandoned nuclear weapons programs, and a few have given up nuclear weapons. So if there’s any trend, it’s toward fewer countries trying to build them, and a stable number of countries possessing them. The bad news is we don’t know whether nanotechnology will change that by drastically reducing the effort needed to build them.
The chapter on totalitarianism discusses some uncomfortable tradeoffs between the benefits of some sort of world government and the harm that such government might cause. One interesting claim:

totalitarian regimes are less likely to foresee disasters, but are in some ways better-equipped to deal with disasters that they take seriously.

Posted in Artificial Intelligence, Book Reviews, Fermi Paradox, Molecular Assemblers (Advanced Nanotech) | 2 Comments »

Moral Hazard with Credit Default Swaps

Wednesday, September 17th, 2008

Charlie Munger in the August 31, 2008 issue of Outstanding Investor Digest:

Let’s say you’re insuring against the outcome that people will lose money on a $100 million bond issue, and the credit default swaps, instead of amounting to $100 million, amount to $3 billion. Now you’ve got people with $3 billion worth of contracts that really have a big incentive in having somebody fail. And they may manipulate in some fraudulent or extreme way to cause a default in order to make the big collection.

There doesn’t seem to be enough transparency in financial systems to figure out whether this concern is relevant to this week’s panic.

Posted in Investing | No Comments »

“Junk DNA” is important

Sunday, September 14th, 2008

Most experts were surprised at the news that human DNA seems to contain less than 25000 genes.
Since then signs have emerged that the rest of the DNA (often called junk DNA is quite active, with about 80% of the DNA being transcribed into RNA even though only 1-2% constitutes protein-coding genes.
There’s a lot of mystery about what, if anything, most of that RNA does, but it’s not all junk. One such RNA molecule, HOTAIR, appears to control expression of some genes. RNA has an ability to fold into shapes that may rival proteins in their diversity, so there’s no good reason to think that creating proteins comes close to describing the set of functions that RNA performs.

Posted in Miscellaneous | No Comments »

Intrade Notes

Sunday, September 7th, 2008

To deter any suspicion that the comparisons I plan to make between Intrade’s predictions and polls are comparisons I selected to make Intrade look good, I’m announcing now that I intend to use FiveThirtyEight.com as the primary poll aggregator. I intend to pay attention to predictions that are more long-term than I focused in 2004, so the comparison I’ll attach the most importance to will be based on the first snapshot I took of FiveThirtyEight.com’s state by state projections, which was on July 24.

Also, as of last week, one of the Presidential Decision Markets that I’m subsidizing, DEM.PRES-OIL.FUTURES, has attracted enough trading (I suspect from one large trader) to make me reasonably confident that it’s showing the effects of trader opinion rather than the effects of my automated market maker (saying that oil futures will drop if the Democratic candidate wins, and rise if he loses).

Posted in Idea Futures, U.S. Politics | 1 Comment »

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