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the psychology of successful trading

Bitcoin Has No Future

Bad Arguments for the Permanence of Bitcoin

I will argue that Bitcoin has no future. I will do that by rebutting various elements of a rather poor article arguing that Bitcoin will be around forever. It appeared here:

https://www.theguardian.com/commentisfree/2017/sep/15/jp-morgan-ceo-wrong-bitcoin-jamie-dimon

The random banker bashing in the headline might give you an initial suspicion about who is likely to be right here.

The first rhetorical question the article asks is “Would Jamie Dimon really sack traders who netted a 1,000% return in less than two years? The bank’s shareholders wouldn’t approve”

The answer to this is definitely yes.  Return alone is an inadequate assessment of trader performance.  We must look at risk-adjusted return. A guaranteed 10% return is better than anything lower than a 50% chance of 20%.  If the trader made his 1000% by betting on a single horse, he took an enormous risk to make his 1000%. The shareholders would certainly approve of Dimon sacking such a trader and in fact would demand it.

Bitcoin Has No Future: Standard “Fake News” Accusation

Next is a ‘fake news’ type criticism aiming to show that Dimon is biased.  He writes “Although JP Morgan was by no means the most leveraged of the banks, it still took bailout money, and, as its CEO, Dimon and bitcoin will inevitably be philosophically opposed.” 

These claims don’t stack up.  Firstly, JP received a bail out post-crisis (fine).  Secondly, Bitcoin is a response to this crisis. I doubt it, but let’s accept this.  Thirdly, JP oppose all crisis responses.  Conclusion: JP opposes Bitcoin forever.  Premise Three is obviously false. It has no defences.

The next section of the article accuses Dimon of not understanding Bitcoin because he says it is a fraud.  The author then admits that the main uses of Bitcoin are for fraudulent and criminal purposes but it is not itself a fraud.  This is parallel to those arguments against gun control which say that guns don’t kill people, people do. This is another obviously stupid argument.

The Weakest Point of the Argument

I will close by criticising a remarkable paragraph which packs in a lot of errors and bad arguments.

“Dimon declares that we will use the technology – blockchain technology – but that bitcoin will be shut down. That’s like saying we will use football pitches, but football players will be banned. One comes with the other. In any case, you can’t just shut bitcoin down. It’s a decentralised, distributed network. That’s the whole point of its design. There is no central point of failure.”

Frisby
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Objections to the Football Analogy

This is very strange.  Take the football analogy first.  There are two major problems with it.  As a parallel, it may or may not work.  Assume it works.  Let’s be generous. 

There are alternative uses for football pitches.  Other sports exists. They became holding centres post-Katrina.  Other uses are possible.  We could land helicopters on them.  So even if Bitcoin ls like playing football and the blockchain is like a football pitch, we can do other things with football pitches and we could do other things with the blockchain.  Strikingly in fact, this is where much of the excitement exists.  There are many potential extremely useful applications of a distributed ledger technology such as property registers and shareholder transaction records.  These would be interesting because they would be highly transparent and resistant to corruption and bureaucratic sloth.

Bitcoin Has No Future: You Can Have a Blockchain Without Bitcoin

The claim that you can’t have a blockchain without bitcoin is false. You do need to pay the miners. But you could pay them dollars. Moreover, that argument needs the blockchain to be useful. That is possible but the jury is still out. So that argument does not work against the claim that Bitcoin has no future.

The second argument in here is equally poor.  It claims Bitcoin is impossible to shut down because it is decentralised.  What this means is that you cannot shut down the servers behind Bitcoin because they are decentralised.  But that isn’t what Dimon says.  He says that “There will be no currency that gets around government controls.” What if governments made Bitcoin possession and use illegal and banned its use in any transactions?  They could do that and then what Dimon has pointed out is true. But no-one has to go around shutting down distributed servers.

Conclusions

I conclude that the author has done nothing to show that Dimon is wrong. So we can be clear that Bitcoin has no future.

See also:

The #Bitcoin Bubble Is Caused By The Halo Effect

The Forthcoming #Bitcoin Crash Will Kill The #Trump Demographic

The #Anecdotal Fallacy And The #Bitcoin Bubble

The Psychology of Successful Trading: see clip below of me explaining my new book!

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the psychology of successful trading

Hindsight Bias In Financial Markets

Introduction

Recently, Lloyd Blankfein of Goldman highlighted an important feature of psychology that has impacts on financial markets: Hindsight Bias.

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He is discussing whether we are in a bubble comparable to Tulip Mania.  The key point he makes for our purposes today is:

“But, of course, you never really know until you know,” he said. “When something happens, 80 percent of the world will remember knowing it … in hindsight.”

https://www.cnbc.com/2017/09/06/lloyd-blankfein-sees-something-that-unnerves-him.html

What is Hindsight Bias?

In psychology, this is Hindsight Bias.  People falsely believe that they predicted events that have now occurred.  I suspect that this is due to another sort of idea much discussed in philosophy.  The common idea of time uses a ‘moving block’ theory. While the future is still open and fluid, the past is fixed. 

The fixed block moves forward as time does.  So, since the past is now fixed, it begins to look like everything that happened had to happen.  And since it was inevitable, we must have predicted it, right?

Wrong.  The canonical experiment on this asks people to assess the probability of events from a story of a war between two countries.  The build up is described and people are asked to assess the probability of war breaking out.  The story is in fact an actual description of the period leading up to a conflict between two Asian powers.  It really happened.

Some months later, people decide that since it did in fact happen, they must have predicted it. It was inevitable, so how could they have missed it?  They claim now that they gave a much higher estimate of probability than they actually did.

How Will Hindsight Bias Affect Your Trading?

What does this mean in financial markets?  A great deal.  Think about what you are

likely to do now if you suffer from this bias, as everyone does.  You will overestimate the probability that you gave to past events. Then, you will over-estimate the probability of your future forecasts being right.  This will make you over-confident at the wrong times and will kill your market performance.

See Also:

The Illusory Truth Effect And Financial Markets

Categories
Trading

You Can’t Unilaterally Change Employment Contracts

Introduction

Despite the fact that you can’t unilaterally change employment contracts, people often seem to try to do it. This is especially relevant in COVID times. You can insist that people you pay to teach for example. But you can’t fire them if they don’t do it in person.

I used to be an investment banker.  This apparently makes me a class enemy to some in the Labour movement.  Although I voted Labour throughout the Blair years, I have been told that my vote is not welcome.  This is the kind of debate, I suppose, that will inform the leadership competition.  Electability or purity?  My point here in bringing this up as a preliminary is so that you do not think I am an automatic union partisan.  I think on this occasion — for the first time — the RMT is right, and if I as a generally unsympathetic person think so, perhaps they are.

It is right that you can’t unilaterally change employment contracts and the RMT is correct to point that out. I will describe why I think that below.

Why You Can’t Unilaterally Change Employment Contracts

It is a principle of employment  law that you cannot  arbitrarily make adverse changes to people’s contracts.  In fact, you can’t ever change a contract without the agreement of the other side.  Public sector management seems to act as if in ignorance of this surprisingly often.  When I was in private equity, we would never have done that.  Sure, we would have fired people who were incompetent and made people performing activities that were no longed needed redundant, but no-one gains from having a disgruntled workforce — and what is more likely to make them disgruntled than trying to change their contracts against their will?

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Here’s how you handle this TfL situation if you are a competent private sector manager.  You say to the workforce, “guys, we need to run an all-night service.  We need volunteers to work ten weeks of nights a year.  We are offering an uplift of five grand.  Who’s up for it?”.  You then find out if you get enough people who want to do it.  We can assume that the current uplift of two grand is inadequate, both for the reasons that it looks inadequate — an extra 100 quid a month in your pocket after the government has taken its cut does not look like a good deal — and because the RMT have chosen to strike rather than accept it.

Consequences of the Fact That You Can’t Unilaterally Change Employment Contracts

One of two things now ensues.  With luck, you get enough volunteers to run your service.  Maybe the younger drivers think they can go to Ibiza a couple of times a year and its worth it to them.  Maybe the older ones value spending time with their families more.  This is fine.  If you don’t get enough volunteers, you either up the offer or recruit.  Maybe you recruit specialist night drivers — there is some evidence that the adverse health effects of shift work are more to do with the disruption of shift changes than the nocturnal activity.  You might have to pay more for these specialist night drivers.  The union should not want to stop you doing this.

https://tfl.gov.uk/campaign/tube-improvements/what-we-are-doing/night-tube

This may of course result in your service becoming more expensive.  This has to be paid for.  The obvious thing to do is increase prices to users of the night time service.  Most of us have had one drink too many in Soho and ended up taking a cab which might cost £30.  If the alternative is a tube which is twice the normal tube price, say £8, that’s a good deal, right?

Conclusions

Although I still think that £49,673 is quite a high non-graduate starting salary, I do think it is fair enough for the RMT to say that it is not on to impose night working on their members.  It is a major adverse contractual change and drivers can reasonably insist on the right not to do it; the response is to pay them more until enough of them agree.

See Also:

John #McDonnell’s Characterisation Of #Finance Is Misconceived

Jacob Rees Mogg Is Wrong To Say That Loss of Passporting Will Not Be A Problem For The City

The Psychology of Successful Trading: see clip below of me explaining my new book!

The Forthcoming #Bitcoin Crash Will Kill The #Trump Demographic

Categories
the psychology of successful trading

UK Deficit Had Been Handled by 2015

Introduction

In 2015, controversy existed over whether the UK deficit had been handled by 2015. This matters now because the situation post-COVID will get much worse again. It shows that it was possible to handle the deficit after the global financial crisis of 2008. After COVID has been managed, we can do it again.

Background

The Conservative claim was that the UK deficit had “halved.” The objection was based on the observation that £91bn is not half of £153bn:

http://www.theguardian.com/politics/2015/jan/02/david-cameron-launch-election-campaign-deficit-claim-conservatives

As the Conservatives correctly argued, the most natural way of considering the deficit is a proportion of the size of the economy.  On this measure, they said it has indeed halved.  I will offer a couple of brief arguments as to why the Conservatives were right to say this.  They could have gone further and argued that the problem was over.  (They may have chosen not to do this because they considered it would be valuable in the election as a way of harming other more spendthrift parties.)

1).  The deficit as a proportion of GDP is the way the bond markets look at deficits.  This is the correct perspective to take, because it is the bond markets who are funding the deficit.  They look at debt to GDP (%) and the deficit is the rate of change of debt to GDP (also %).

2).  Relatedly, looking at the absolute number makes no sense.  If I ask you whether a £5,000 overdraft is a problem, you will ask me what the person who has the overdraft makes in a year. With no income, it’s a big problem.  If they make £80,000 a year, it is no problem at all.

Now I will look at what they could have said.

Budget Deficits

Now I will look at what they could have said.

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The UK budget balance as a % of GDP was -4.5% of GDP.  (All of my numbers are going to come from the table on p. 96 of the 13 December 2014 issue of The Economist.  They caveat their number as being either from “The Economist poll or an Economist Intelligence Unit estimate/forecast.”  We do not need to worry about this as the number is about right. They were just allowing for the fact that they are making an estimate for the whole of 2014 slightly before it ends.

We now need to know the trajectory.  The first benchmark is the Maastricht criterion.  Although the UK was not looking to join the Euro, that is a relevant benchmark of UK peers.  It requires the deficit to be 3% or less of GDP.  (Again, note that we state the criterion as a % of GDP because that is the only sensible way to look at it. It’s on that basis that we can conclude that the UK Deficit Had Been Handled by 2015)

I saw estimates before the 2010 election that the previous administration was looking to borrow 15% of GDP p.a.  That was terrifying, not least because 1.15^5 = 2.01 i.e. 15% a year doubles debt to GDP in a single parliament.  That is a doubling of the national debt before you get another chance to intervene. That’s a reason for COVID caution.

GDP Percentages Show that UK Deficit Had Been Handled by 2015

Now, perhaps that 15% estimate was political.  More neutrally, all sides agreed that the deficit had reduced from around 10%.  Let us take that number.  Now consider this: you can run a deficit at the same level as your nominal GDP growth without changing your debt to GDP number.  Since that is what bond markets care about, it should be what you care about as well.  GDP growth for 2014 is 3.0%.  So imagine we want to get from 10% to 3%, then the distance we want to travel is 7.0%.  We have actually moved from 10% to 4.5% i.e. a distance of 5.5%.  5.5% divided by 7.0% = 79% i.e. we really only have another 20% of the distance to go.

Why You Can’t Borrow for any Purpose

Now I was the first to think we should continue to bear down on the deficit. In particular it is a really bad idea to fund OpEx with debt rather that Capex. This means you can borrow to fund actual investments in actual pieces of infrastructure which pay you actual GDP benefits but you cannot sensibly borrow to keep the lights on or to pay benefits. That won’t work. However, a lot of the work was complete.  I would at that stage like to have seen the deficit number reduce only slightly but shift spending into sectors which will produce a GDP return.

Two ideas: the Germans lend EUR16bn a year to their famed SME sector.  The Israelis generated a globally successful tech start-up  industry by `pouring money into elite universities and creating a clever system to attract venture capital’ (The Economist again, p. 76). So you can spend wisely. It just doesn’t happen very often.

Conclusion: UK Deficit Had Been Handled by 2015

The UK Deficit Had Been Handled by 2015 but it is going to be a problem again after 2020.

See Also:

Scotland Has no Feasible Currency Options on Independence

Categories
psychology the psychology of successful trading Trading trading psychology

Kerviel: How He Got Away With It

Jerome Kerviel, accused of being a rogue trader, is now on trial. SocGen lost $7bn in the incident which heads the list of major trading losses.

http://en.wikipedia.org/wiki/List_of_trading_losses

How did he do it?

This is actually a very similar situation to Nick Leeson at Barings – number 11 in the top list. They were both involved in forms of arbitrage, which exploits tiny differences in price which ‘shouldn’t’ really be there. In fact, pricing theory fairly obviously requires that there can’t be a price difference between two identical items. If that were false – say if one loaf of bread had a different price to an identical one – then I could make a risk free profit by buying at the low price and selling at the high price. And there can’t be a risk free profit because everyone would pile in. You can see that what would happen would be that the prices would equalise.

Now this is what the arbitrageurs exploit. It all hinges on what ‘identical’ means. Not quite identical introduces some risk. Leeson was buying one product in Osaka and selling the same product in Singapore. Clearly if the product is the same, exactly, there is no risk. You might ask what might cause a price difference – there might be transient local factors such as someone big in Osaka decides to buy something. And then there could be a delay before Singapore catches up. And that catch-up process is exactly what the arbs do.

Kerviel was involved in arbing equity index futures and underlying equities. Equities are stocks, indices are groups of stocks like the FTSE-100 and equity index futures is just a bet on where the FTSE-100 will be in six months from now. Clearly you can do that on a risk free basis if you, say, sell the index and buy all the stocks in it. [Incidentally, if you want to be an insider trader but don’t want to go to prison, maybe you could buy an index in which the stock you can’t trade figures and then sell everything in the index except the one you aren’t allowed to trade…but I don’t recommend it…]

Why is it dangerous?

There are two common factors between this case and Leeson. In both, the alleged misdeeds were possible because the trader and the back office person were effectively the same person. Leeson actually did his own monitoring, an extraordinary failure which rightly cost the jobs of many at Barings. I could go further and say it was so remarkable that everyone involved in the company deserved to lose all their cash, but I know there were lots of Barings debentures held by grannies and I suspect we can’t expect them to have known what they were doing. While Kerviel came from back office himself and knew the control systems and would have known how to defeat them. I also will claim that back office types are rather easy for front office traders to browbeat and this history will have played a part in Kerviel’s psychology and the desire to get somewhere fast.

Secondly, because you are exploiting tiny price differences, you need to trade in vast amounts. And all the time. The control problem comes when you do not have offsetting equal and opposite trades but wind up taking huge uncovered positions. Leeson sorted this out with a fax purportedly evidencing a large receivable from a hedge fund. Towards the end, he was drawing in funding from all over Asia, which should have alerted someone.

What is odd about this case?

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You can’t make large amounts of money from arbitrage. You just can’t, because risk and reward are closely linked. You can see from the loaf of bread example that that has to be true. So if you are a manager in an I-bank, you need to get very concerned if your arbitrage desk is making large profits.

Now this leads to the strange consequence that Kerviel must have been concealing large profits. And this is what you see.

http://news.yahoo.com/s/nm/20100608/ts_nm/us_socgen_kerviel

“During the largely procedural first day of the trial, Kerviel’s lawyer said Societe Generale would have been clearly able to see data showing Kerviel’s extraordinary profits of 1.4 billion euros at the end of 2007”

Note that this is profit not revenue, and that SocGen as a whole might typically make a net profit around EUR600m in a quarter. Do you think you could spot Kerviel in there?

“Seated on a plastic chair in front of rows of lawyers in black garb, the ex-trader said his annual salary at Societe Generale was 48,000 euros in 2006 with an annual bonus of 60,000 euros”

Now that is not a lot of money for traders. They might typically expect to make 5% to 10% of what they produce, or more in some cases where they are reliably producing large returns. Apparently Kerviel was expecting to make EUR300,000 for 08, on a declared profit of EUR60m. That’s a 0.5% return. You can see that this is not enough. Someone with that type of track record could just set up on their own, use the track record to raise funds, and trade themselves for maybe 50%. There is another type of arb there.

The GBPEUR exchange rate in 07 was 0.67, so we are talking about someone earning a salary of £32k. This is not far north of what we used to pay graduate trainees in London. So what we have here is someone being paid back office amounts, a French I-bank culture in which you shouldn’t really pay very much or have high quality people, and back office resentment of the flash and the furious.

“Lawyers also read a transcript of a conversation between Kerviel and SocGen’s ex-investment bank chief Jean-Pierre Mustier when the scandal broke, in which Mustier reportedly said: “If you won 1.4 billion euros, that means you’re very good. What you did was a pain, but it’s not a big deal.”

If Kerviel can make that out, then Mustier has failed in a stunning way to understand what arbitrage is. It is a French word, after all. It may be difficult to see how Kerviel can avoid jail, but he cannot have been on his own in this one.

See Also:

What Is “Theory Of Mind?”

The Late Evaluation Effect And Financial Markets

The Psychology of Successful Trading: see clip below of me explaining my new book!

The RMT Is Right, Just This Once

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the psychology of successful trading

Thorium Profits

Current excitement in the Gulf of Mexico demonstrates one of the reasons why we need new angles in energy. That didn’t stop me buying BP shares at the weekend – after a price decline from 647p to 517p I put in a limit order with an upper limit of 500p, just to see if it would get that low. I got filled, which I thought was great until the top kill/junk shot tanked later on. So right now we are off 13% to 430p. My response to that was to buy some more – call me psycho. Anyway, in a year either I will have been wiped out or made out like a bandit, and those are the only two options I am interested in. Life choices are the same as trade choices. In case you were wondering.

But anyway, to the point. Nuclear power is better than carbon-based energy generation. It’s greener – and you can’t defeat that argument by pointing to the waste problem – because we already have that problem. So we may as well have it in spades, right? In any case, the Finns are going to sort it out by sticking it deep underground in a sort of fairly stable rock chamber. And isn’t it about time the Finns contributed something? Where have they been lately? There’s been lots going on and we never hear from them. Finland buries its nuclear past. But does that look like good press? Is there a different answer?

Yes – there’s even a better option: thorium. For three major reasons.

Less waste

Thorium-based reactors produce waste products which have a half life much shorter than the 100s of thousands of years involved with uranium reactors.

It’s available

The uranium is going to run out. And quicker than you think if you note that we have maybe 60 years worth. That is at current rates of use but you might want to assume greater energy use in the future and a higher nuclear component.

It’s not weaponisable

You can’t make nuclear weapons from thorium. So if one state, say the US, wanted to persuade another state, say Iran, to act consistently with the latter’s stated intentions only in the realm of power generation, it could offer them thorium based reactor technology and then be intensely relaxed about the consequences. Because there wouldn’t be any.

So who believes this story and does anyone care?

HATCH, REID INTRODUCE NEW THORIUM NUCLEAR FUEL BILL TO PROMOTE ENERGY INDEPENDENCE

This is a Bill in the US Senate which notes that the energy dependence of the US is a national security issue for that country. There’s another Bill in committee which observes that the US nuclear submarine fleet would be grounded (I know that’s wrong – but what happens to non-flying vessels when they can’t go anywhere…?) without uranium fuel. And mandates the Secretary of the Navy to look at thorium as a replacement.

Photo by Skitterphoto on Pexels.com

Congressman Sestak’s Amendments in National Defense Authorization Act Pass House

So this is a US national security issue and a convincing picture in general. But the former element means one thing: lots and lots of money. Where’s the thorium? Virginia, for example. Not so much dealing with difficult people for essential products.

So what should you do if you believe the story? These are the two stocks to buy. Firstly you want exposure to the design story. And secondly you want some thorium. There’s the usual triple lock on investment decisions: compelling story, pure exposure, acceptable risk. The first box I already ticked. Secondly you can buy two stocks as listed below. The first one is a consultancy specialising in thorium reactor design. The second one is basically a very speculative outfit with at least three men and a dog in Canada. They have a licence to dig in a hill next to one where some people before found some thorium. [Actually it’s better than that – today they announced the hiring of a new experienced exec and they gave him “incentive stock options for 150,000 shares exercisable over 5 years at $0.14 each, subject to vesting provisions”. So this guy believes they are going north of there.]

Lightbridge Corporation

RockBridge Resources Inc

It will be apparent that option two is slightly more risky. Option one isn’t safe because nothing is, but it is NASDAQ listed so you have some better transparency and reporting. Though you should never forget that Enron was main board listed. Rockbridge are listed on the Vancouver startup board but you can get the exposure through a pink sheet OTC trade in NY. This is a pass-through derivative. So the recommended division should be something like 90/10. Which was what I was going for when I did this trade on behalf of myself and Mark L – except I got confused by the factor of two and ended up with 80/20. When you try to hold 20 numbers in your head at the same time, you always forget one, or mix up GBPUSD with USDGBP or something. But again, trades are like life and serendipity can be the new name for chaos.

See Also:

What Is “Theory Of Mind?”

The Psychology of Successful Trading: see clip below of me explaining my new book!

The Illusory Truth Effect And Financial Markets

The Late Evaluation Effect And Financial Markets