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In an earlier post, I profiled a “technical” market analyst who claims he can predict stock market movements based on a mathematical sequence called the Fibonacci progression.  (See below for a details.)  I opined (as would most) that his recent success derived more from coincidence than prescience.

I have since delved into the work of Nassim Nicholas Taleb, a trader-turned-philosopher, which addresses just this point.  Taleb, author of the best selling The Black Swan and Fooled by Randomness, has made a career (and recently, some fame and fortune), on debunking investors’ assertions that they can predict movements in financial markets.  Taleb believes not only that “technical” analysis does not hold up over time (else people would learn the technical signs divining market movements and jump in front of them, thereby changing the very technical signs they hope to use to their advantage).  He further asserts that most successful traders’ success (particularly the hottest traders at any time, “technical” or not) derives more from luck than from ability.  Taleb believes we are biologically ill-equipped to understand randomness, and so underestimate its role in our triumphs (while overestimating its role in our failures).

There is much appealing about Taleb’s work.  In Fooled by Randomness he points out many ironies about life you may recognize from time to time but quickly forget.  (Journalists are not out not so much to impart information as to entertain; corporate executives often are chosen as much for their presentation skills as for their business acumen; finance professionals may ignore remote but catastrophic risks to juice short-term results and hence their bonuses.)

But for this observer the most entertaining portion of Taleb’s work is the introduction to Fooled by Randomness (second edition), which is both funny and representative (in a nutshell) of the broader themes of Taleb’s work.

The book itself is intelligent, witty and demonstrative of deep reading (Taleb is deeply familiar with ancient history, philosophy and medical science) but otherwise perhaps not terribly informative.  It should come as little surprise to the reader that much of life is random, and that we do not have great tools for dealing with this, and never did.  I am not sure I needed to read an entire book to remind myself of this.

Bottom line: If you have a Kindle, I recommend downloading the free sample, which includes the introduction.   (Or, visit a bookstore and devote five minutes to the opening pages).  It may reel you in, as it did me.  But remember, while the book may vindicate some buried suspicions you’ve long harbored about society, it may not give you many new ones.

This week I read Hedgehogging, Barton Biggs‘ 2004 treatise profiling a series of successful investment managers and the trading styles they live by. 

Hedgehogging is even-handed: Biggs offers his take on each style but ultimately acknowledges that we don’t know for sure which ones, if any, are better than the rest.  One manager he profiles sells a stock as soon as it declines a certain percentage (“momentum” investors may follow this course); another doubles down in the same situation (“value” investors may take this route).  Both styles have extremely successful adherents.  This sort of paradox gives the book with a nice, nuanced feel. 

Hedgehogging

Just Another Investments Book?

Yet the most intriguing thing about Biggs’s book is that it was authored in 2004.  The investors he profiles often make predictions, and today’s reader thus has the privilege of testing their accuracy.  Curiously, the most accurate prediction recorded in Hedgehogging is by a technical analyst whose theories Biggs largely rejects. 

The analyst, whom Biggs calls “Maine”, due to his geographical location, insists that financial markets move over time in predictable waves discernible in advance by reference to the Fibonacci progression.  This progression begins with the sequence 1, 1, 2, 3, 5, 8, 13, 21, 34 and continues ad infinitum by simply adding the most recent number in the sequence to the number immediately before it to obtain the next number in the sequence.  For instance, in the sequence listed above, we would take 34 (the most recent figure), and add 21 to produce 55, which is next number in the sequence.  55 would be followed by 89, or the sum of 55 and 34. 

The progression seems trivial, but before you dismiss it, know that shells, horns, the human ear, the keys on the piano and a deck of cards all in their own way reflect the same numerical ratios that underlie the Fibonacci progression.  The ancient Egyptians were said to have built the Great Pyramid of Giza, and the Greeks the Parthenon, based on those same ratios.  The idea was that the ratios produce shapes that occur throughout nature and are thus the most naturally pleasing to the human eye.  Da Vinci allegedly based many of his paintings on this concept, in order to make them most attractive. 

If a link exists between Fibonacci’s progression and natural forms, however, this hardly proves that it should apply to the stock market.  But what’s most striking about Maine’s application of the Fibonacci progression to financial markets is his call that the S&P 500, which topped out in 2003 at 1050, would next bottom at 650.  (650 divided by 1050 equals .618, approximately the same ratio obtained by dividing any number in the Fibonacci progression by the number immediately following it.)  Silly?  Sure sounds like it.  But the S&P 500 next bottomed, in 2008, at 666.  Not a bad call!

Some People See Fibonacci in Everything

Some People See Fibonacci in Everything

Of course, this may be more evidence of a coincidence than of Fibonacci’s predictive force.  After all, even were Maine’s projections correct, you would think that people would soon realize this and start trading based on his ratios.  Presumably, this would throw off his whole delicate balance, markets likely being too self-referential to follow rote patterns for any period of time. 

Yet who is to say.  One appealing aspect of Biggs’ book is that he recognizes the limits of our knowledge and leaves one ear open to “kooks” like Maine.  I am as skeptical as Biggs.  But then again, who cares if Maine is wrong–if you sold at 1050 and bought at 666.

Communism Isn’t Dead Yet?

My brother gave me Slavoj Žižek’s idiosyncratic philosophical exploratory, First as Tragedy, Then as Farce, for Christmas.  This was my first Žižek, and it will not be my last.     

Anticapitalism in New York's Subway

Anticapitalism in New York's Subway

For those of you who do not know him, Žižek is a communist who made his name as a presidential candidate in Slovenia when, as part of Yugoslavia, it was still referred to as, in that most communist of terms, a “People’s Republic”.   Today, he teaches in London as a university professor-cum-popular-philosopher.  First as Tragedy is short (150 pages), entertaining and, with notable exceptions, accessible.  Žižek weaves pop culture (he mentions Kung Fu Panda and M. Night Shyamalan’s Unbreakable) and current events (the ongoing financial crisis; Obama’s election) into an exploration of his broader economic and political philosophy.  The book’s colorful and irreverent cover (see below) is indicative of what’s inside. 

First as Tragedy

First as Tragedy

I won’t go into details, as political philosophy at Žižek’s level is over my head.  Suffice it to say that his thesis, as I understand it, is that we know something is wrong with capitalism; we (including the vocal Left) have nonetheless resigned ourselves to accept capitalism and work within it; we (including the vocal Left) have given up on communism as an alternative and turned toward the ultimately traitorous concept of “liberal democracy”, or working within capitalism to promote Leftist goals; and that we (including the vocal Left) should look instead to communism.  Only, this time around, we should look not to communism as it existed (with unfortunate practical effect) in the 20th century (think: Soviet Union) but a new communism “begun from the beginning”, or reinvented without borrowing from earlier forms or re-attempting failed experiments.

The book gives little practical guidance as to how we may initiate such a reinvented communism and try to make it work in the real world.  But maybe that is, for Žižek, a step to be taken only once he has convinced enough people that communism is once again a plausible alternative.  Perhaps only then will sufficient brainpower and resources be devoted to the cause that we can start to figure out how communism may work in practice.

More Subway Anticapitalism

Animals Can Be Communists, Too

But is Žižek right, about a political system long left for dead?  It is of course difficult to tell.  Any time you suggest that something will work that has not been tried before, it is hard for others to prove you wrong (particularly if you describe it in the vaguest of terms).  But it is also hard to prove yourself right.

In any event, as philosophical treatises go, First as Tragedy is pithy and entertaining enough to merit reading.  At the least it will address problems you already recognize with today’s society, regardless of whether you agree with his proposed solutions.  And there is little harm in challenging us to think differently than we have been conditioned to think.  What is generally accepted in society (the earth is flat; housing values will never decline) often is in time turned on its head, and in Žižek’s work you see this very clearly.  Take a couple hours to read him; if not a new political philosophy, you will have a couple new things to think about.    

My wife and I watched Sofia Coppola’s Marie Antoinette this weekend, expecting little from a film about one of the world’s least interesting historical figures.  (OK, so my wife watched it for other reasons.)  And little is just what I received, though Jason Schwartzman is about as funny as Louis XVI, Marie Antoinette’s husband, can get.

The movie boils down to a Wicked-style refurbishment of a real-life historical villain.  (Take Wicked, replace “I’ll get you, my pretty” with “Let them eat cake”, remove some singing and dancing, add some British angst-pop and you have Marie Antoinette.)  I found the former uninspiring, and the latter only slightly less so.

Marie Antoinette does better its twin in two ways: it presents a more subtle and less trite character rehabilitation and a sometimes-intriguing glimpse into royal Versailles.  (Oz is interesting too but we already know about all we need to.)  The film depicts the bizarre rituals the “Sun King”, Louis XIV, first imposed on the court in the preceding century, after moving from earthly Paris to ethereal Versailles, so as to keep the court busy in his bedchamber and away from the battlefield.  (They’d wreaked havoc on France for centuries fighting over land and plunder; battles over who gets to dress the king seemed preferable.)  Evidently Louis XVI preserved these rituals, and we see them applied to his wife here in gruesome detail.  This King Louis would be the last to enjoy this glamorous world, and the film gives us some sense of why.  (Starving peasants whisk him away at the end of the film.)
 
But Marie Antoinette overlooks the most vital chapter of the story.  We care about Marie Antoinette and her husband because the rebellion that seizes them at the end of the film was no food riot but the French Revolution.  The film shows that the peasants are hungry and that the state is bankrupt.  It also shows that the people view the king and queen as indifferent to their fate.  But these conditions appear time and again in history, and the French Revolution doesn’t.  What makes this era unique, Ms. Coppola ignores.
 
Maybe this is her point.  Like the audience, the king and queen see very little of what goes on outside the palace walls.  Character rehabilitation would hardly be effective if our heroes saw suffering and injustice, then looked away.  The king and queen have little chance to see the legal and political inequality that favors some according to birth.  They do not know that the state is bankrupt because it refuses to tax the rich.  They cannot see that a new class of bankers, lawyers and businessmen looks to upset the longstanding social order that favored the well-born over the self-made.  This is what makes for a revolution and not a riot.
 
But one question remains: couldn’t Ms. Coppola leave the king and queen in the dark, without leaving the audience there as well?

I tend to picture Romania as a land of beautiful, intelligent and forgiving women, because my wife was born there.  But like other countries, Romania has its troubles, and these are rising to the fore today as its people hit the polls to choose a president.

Their troubles: corruption and a souring economy, two sources of distress common to much of eastern Europe as it struggles to distance itself from its Communist past.  Corruption in Romania remains particularly rife and has been sited by some as the worst in the European Union, though Greece and Bulgaria trail not far behind.  Romania’s economy in recent years has fared little better: the International Monetary Fund projects that it will contract by 8% this year.

But perhaps the biggest challenge for the country is its choice of candidates; Romanians seem unethusiastic about voting for either one.  Traian Basescu, the incumbent and centre-right candidate, has made limited progress in combating corruption and strengthening the economy during five years in office, though he remains far more forceful rhetorically on both issues than his rather less outspoken opponent.  For one, he has promised to chop away at the bloated public sector, which accounts for one in every three Romanian jobs and drags proportionately on the economy and public finances.

Mircea Geoana, the leftist challenger, is running as a Social Democrat in a country where leftist politics invoke painful memories of Romania’s Communist past.  (Romania’s Soviet-era dictator, Nicolae Ceauşescu, was among the period’s harshest, bringing about his execution amid popular revolution in 1989.)  Geoana’s reluctance to shrink the often self-serving public sector to the extent considered necessary to bring both corruption and the downward economic spiral into check may risk the country’s access to previously committed (but not yet provided) IMF funds.  Neither candidate’s platform has Romanians convinced that their lot will improve.

But both candidates have their bright spots: Geoana, a former foreign minister and ambassador to America, has a rather more diplomatic approach than his opponent and may prove more capable of working amiably with parliament, which impeached Basescu in 2007 (he was preserved in office by a national referendum the following month).  Geoana’s candidacy is further strengthened by his promise (if elected) to appoint as prime minister the popular mayor of Sibiu, an ethnic German who led this small Transylvanian city to a cultural and economic renaissance that Romanians would love to see duplicated for the nation as a whole.

Basescu, on the other hand, seems more firmly honed in on the problems that Romanians most urgently need solved.  Despite a decidedly mixed record during his term of office, he appears more likely to continue the war on corruption (his support for reducing the swollen government payroll is a definitive step in this direction and a sharp contrast to Geoana’s approach) and drive Romania toward the economic changes it will need to fall in line with EU norms, a likely step in the right direction given persistent economic gaps between East and West in the European Union.

What will happen, only time will tell.  But the last time things went badly in Romania, I got a wife (she fled Ceauşescu’s regime in 1984, though I did not meet her for another 20 years).  Maybe they should vote Soviet once more.

The European Union made waves two weeks ago when it chose a known opponent of Turkish membership in the EU as its first ever president, a Belgian politician name Herman Van Rompuy.  But Van Rompuy is not alone: most Europeans indeed seem to oppose Turkish accession, a hangup potentially fatal to an applicant whose acceptance requires a unanimous vote of existing EU member states. 

The problem for Europe:  Its indifference is driving Turks to look elsewhere for support.  There are two places Turkey is looking.

The first: a renewed emphasis on diplomatic ties with Arab neighbors long shunned in favor of more alluring western overtures.  Ever since Mustafa Kemal Atatürk, the founder of the Turkish republic, launched an historic national westernizing and modernizing initiative in the 1920s, Turkish eyes have looked westward for a glimpse of the future.  Today those eyes are wandering.

The second: a surge of cultural nostalgia for the days of yore when the Turks did not so much admire Europeans as strive to conquer them (and often with great success): the six hundred year span of the Ottoman Empire, that great and sometimes sprawling state that engulfed at its greatest extent land from the outskirts of Vienna (which it besieged repeatedly) to the Indian Ocean and conquered not only the last remnant of the Roman Empire, Constantinople (now Istanbul) but much of north Africa and the Middle East to boot.  A recent New York Times article reports that this Ottoman nostalgia is manifesting itself in such varied places as Ottoman-period docudramas, sultan-adorned nic nacs, period-inspired Burger King commercials and T-shirts that read, “The Empire Strikes Back” (referring not only to an Ottoman past but, ironically, a most Western and modern of cultural icons).

The Turkish response is understandable.  Having applied for membership in the EU in 1987, they are tired of waiting.  Underhanded insults such as France’s effort to change its own constitution to require a French popular vote (which the Turks would likely lose) before it can approve Turkish membership in the EU have led to an understandable strain on Turkish national patience.  Undercurrents of religious intolerance (Christian Europe has widespread reservations over increasing Muslim immigration, and Turkey is a majority Muslim nation), newly evidenced by the recent Swiss ban on building new minarets, do not help.

Yet Europe’s own reaction may be less understandable.  A society may always be entitled to consider its cultural heritage and identity; and one can surely understand the impulse to protect religious and cultural traditions that have offered continuity to a continent otherwise riven by change for century after century.  But given Turkey’s position at the geographical and cultural crossroads of Europe and Islamic Middle East, one might expect Europe to court it at all costs; the EU can hardly wish estrangement from a military and strategic ally that boasts the second largest military force in NATO

But concerns over an immediate eastward Turkish realignment are likely overblown, and Europe may have ample time to address its internal cultural and religious reservations, before it loses Turkey from the fold.  After all, there is a long leap from a trendy subversive T-shirt to a renewed siege on Vienna.

John Law Is (In)Famous Again.

The financial crisis of the past two years has brought renewed attention to eighteenth century financier and market bubble-blowing extraordinaire John Law.  Law, a Scotsman exiled from his homeland following a duel, was soon entrusted by France, at a time of profound national indebtedness, as a top-level financial advisor and designated national savior.  France had incurred a sizeable national debt during the extravagant wars of its equally extravagant “Sun King”, the late Louis XIV, and the Sun King’s successors believed that Law, who between dueling and fleeing had devised unique theories on fiscal and economic policy, could help to narrow the financial gap.

Law’s scheme was first to establish the nation’s first central bank and then to combine the bank with a trading company that was granted exclusive trading rights to French colonial trade (but named, Amero-centrically, the Mississippi Company).  The chimerical new bank/trading company aimed to resolve the national crisis by buying up the French national debt from the government’s various creditors and paying for it with newly issued shares in the combined company.

For debt holders, this seemed a good deal.  Government debt was at great risk of payment default, as the nation struggled to make its required interest payments.  Shares in the Mississippi Company, in contrast, seemed to offer boundless wealth: rumors of silver and gold, not to mention pelts and agricultural surpluses, abounded in France’s American territories; and investors not only traded in their government debt for shares in the company but soon began to sell their own agricultural surpluses and even mortgage their estates, so as to free up the cash to buy additional stakes.

The result: a bubble, as shares in the Mississippi Company rose from 500 livres per share to 18,000 in the course of a year.  The catch: like most bubbles, this bubble burst, and burst badly, dropping the share price back to where it started, as quickly as it had risen.

Mississippi Company shares, after their return to earth, proved from that point on quite lucrative (but of course nowhere near as lucrative as projected during the bubble).   John Law himself would be less fortunate, dying in penury in Venice less than a decade after the collapse.  He would, however, receive some postmortem comfort: Joseph Schumpeter, a prominent 20th century economist (still well regarded today) considered Law (without sarcasm) “in a class by himself“; and on Law’s 300th birthday the United States paid him perhaps his greatest compliment of all by removing the gold backing from its currency, a step toward which Law had edged his newly founded French central bank in the eighteenth century.  Today the gold standard is nowhere to be found.

Yet today John Law is back in the news, and in a less favorable light.  The bubble of the mid-first decade of the 21st century has brought renewed attention to the manic-depressive gyrations of financial markets and the uncertainties brought about by governments’ monetary policies.  Maybe our new crisis will give the world another John Law; in the mean time his name remains synonymous with financial market excesses and the often-ensuing financial catastrophes.

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