Category Archives: Rogues and Rascals

Huh

Somebody was working awfully hard in the last half hour to get a positive close today, although they missed by one lousy point (0.04%) on the S&P. I wonder why?

Loose Cannons

In the days of fighting sail, the ship’s main armament typically consisted of rows of cannons lined up on each side of the ship. These cannons fired through ports in the side of the hull and were mounted on wheels so that they could be pointed and able to recoil when fired. Normally, they were constrained by heavy ropes. But from time to time one or more would get loose. Each cannon could weigh as much as three tons and would then roll around the gun deck as the ship pitched and rolled, crushing anything or anybody in its way. The gundeck would be crowded most of the time – each gun on a large ship had a crew of 14 men who not only worked but ate and slept near their gun. Needless to say, a loose cannon could do much more damage than any broadside from an enemy ship.

In the market, the black boxes or “algos” are the equivalent of the loose cannons of yore. They are out of control and roll around in herds, as many of them share similarly programmed rules. You can watch the “herding” in the stock market by watching the “Tick” as it moves to extremes in both directions – that’s the herd. You hear about “flash crashes” – that’s a herd of algos running over some security or asset class. They pose a huge danger to the financial system, and need to be reined in. The mistake that the regulators make is to only consider them as single entities, without comprehending the emergent phenomena arising from unintentional herding behavior.

The Tide Is Falling

As I have expected and warned, successful attacks on “crypto” networks are now occurring. They are moving up the food chain to the larger networks, now Ethereum has been compromised. At this point, it is just a matter of time before Bitcoin is the victim, probably through one of the smaller forks. The tide is falling, exposing more and more naked swimmers.

Unlike economics, there is a solid mathematical foundation behind computation. The general problem of consistently obtaining reliable consensus in an untrusted distributed database network has been proven to be unsolvable. Simplifying assumptions are required. The blockchain system assumptions (consensus is not required; a majority vote within a time limit is good enough) are clearly inadequate in the face of deliberate attack.

The teaching of computer science in schools is pretty much a joke from what I see. Teaching Word and Excel is not teaching computer science. It seems that a weird variation of Gresham’s law is in operation these days, where bad science drives out good.

Note: At least 3m+1 generals are required to cope with m traitors. But the open blockchain networks have no constraint on the number of traitors other than what it costs to add “traitorous” nodes. Blockchain could work within an organization where the network is tightly controlled. But then the performance issues….

The Tilted Playing Field

The stock market is supposed to be a level playing field for all participants. But it clearly isn’t, and the referee, the SEC, doesn’t care and actively favors the tilters.

Understanding the issue is straightforward. If, every morning, you got the day’s closing prices, do you think you could make money? Of course, it would be a no-brainer.

How about an hour from now’s prices? Or a minute? Same answer, although you’d have to be quick. If you’re a computer, you could be quick enough.

Well, the favored few have computers, and no they don’t get a day or even a whole minute but they do get fractions of a second and that’s plenty for a computer capable of billions of instructions in a second. They are allowed direct connections to the exchange computers and are often only a few feet away to minimize any network delays. So they see prices before you do, and can respond before you can. Making money consistently is easy-peasy. They do pay the exchanges for the privilege, but that’s nothing in comparison to the profits they reap at your and my expense.

What can you do about it? Not much. Just remember the SEC is the retail investors enemy. Like many government employees, SEC personnel are corrupted by the promise of lucrative sinecures after their stay at the SEC. It’s called regulatory capture.

So they go after visible but harmless and relatively defenseless prey like Martha Stewart.

Jawboning

Well Trump saw the market was down 300, more or less, so… he got on the wires and said that “China talks are going well” and he thinks “US will reach a trade deal with China.”

That’s a blatant attempt at jawboning the market higher. Of course the algos went berserk. What BS. But it shows how important he thinks the stock market is to electoral success, and that he will do “whatever it takes” to keep it up. Well until Tuesday’s close, anyway. After that he will likely be able to blame the Dems.

Meanwhile the ten-year is solidly above 3% and rising. Dems will need a miracle. Expect a panic soon.

Three More Days

Trump needs to hold this market together, if not continue the rally, for three more days, until the mid-term voting is concluded as the polls close on Tuesday of next week. More learned minds than mine have opined that the force behind the rally is short-covering by some large fund that is massively short gamma (e.g., has a short put position). Moi, I think that the explanation is more mundane and is closely related to Trump’s need to hold things together.

Supposedly the seasonality is positive after the mid-terms, but I have to wonder as the level of vituperation from the Dems would seem to bode ill for the political climate. The Dems seem to have no agenda but to oppose and/or impeach Trump and prove that Hillary was robbed. Time to move on, folks.

The employment report this morning included more than a hint of inflation, which is usually toxic to the stock market. Given the historically (hysterically?) extreme level of valuation, risk is off the charts.

Be careful out there.

Those Words Again

Fed Chairman Powell, speaking this morning at the Jackson Hole festival of central banker self-love, promised to do “whatever it takes” to prevent another financial crisis.

Unfortunately, Mr Powell, your predecessors have done everything that it takes to guarantee another crisis, a truly special one this time.

Blockchain RIP?

The blockchain technology is a partial solution to the Byzantine generals problem. A full solution to the problem has been mathematically shown to be impossible. As a result, blockchain systems are vulnerable to attack by introducing enough fraudulent voting power to improperly modify the blockchain.

Apparently this is now happening to some of the smaller networks.

The potential prizes on the larger ones are rich enough that it is probably just a matter of time until one of them is compromised for serious money. Then we’ll see what happens.

Voting With Their Feet

In 2017, Illinois lost a net 33,703 residents, the largest numerical population decline of any state.

“We could handle the cold, avoid the crime and pay the tax. But the government turned on us (property, income, sales, parking, red-light/speed cameras, bags, soda). Never-ending. Tired of paying for everyone else’s retirement before mine,” said one respondent.

I guess he hadn’t run into the vehicle impound program yet.
Per WSJ:

In the years to come, millions of people, thousands of businesses, and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states…..

For years blue states have exported a third or more of their tax burden to residents of other states. In places like California, where the top income-tax rate exceeds 13%, that tax could be deducted on a federal return. Now that deduction for state and local taxes will be capped at $10,000 per family.

Consider what this means if you’re a high-income earner in Silicon Valley or Hollywood. The top tax rate that you actually pay just jumped from about 8.5% to 13%.

Of course, as the pain of lavish pension plans really starts to kick in, the tax burden will become greater still.

Chicago

Chicago is ground zero for the Obama/Clinton school of Democrat liberal politics. Chicago is Obama’s home town and current mayor Rahm Emanuel was his chief of staff.

So it should be a great place to live, right? Wrong.

No need to re-iterate the shootings, the disastrous finances, the corruption. It is just that, for sheer nastiness, it is hard to beat this.

Byrd had run afoul of Chicago’s aggressive vehicle impound program, which seizes cars and fines owners thousands of dollars for dozens of different offenses. The program impounds cars when the owner beats a criminal case or isn’t charged with a crime in the first place. It impounds cars even when the owner isn’t even driving, like when a child is borrowing a parent’s car.

This civil asset forfeiture idea, originally invented to strip drug dealers of their assets as part of the “War On Drugs,” is a massive abuse of the rights of innocent people. It is a good reminder of the fact that government is a parasite that sucks the blood from the rest of us. And yet people keep voting for more of it. Talk about the triumph of hope over experience.