This is a collection of some of the more interesting economic phenomenon observed recently, and forms a key part of my research work on markets and efforts to develop AI-based Augmenter tools.
picture at right, is of the Probability Calculator - here shown running on Samsung Tab-A tablet. It tells you - for a given level of capital, and a chosen level of acceptable risk, how big a bet should be, and what the expected outcome is. Everyone has this
type of tool now, and there are few asymetric opportunities for arbitrage. But they do sometimes still come up.
[Sept 21, 2017] - Image montage of Phyisocratic School of Economics, as proposed by Francois Quesnay,
in 1770's, suggesting agricultural surpluses are the source of all real economic wealth. This theory was taught to us in school as a discredited and obsolete idea, but in a crowded world, stuffed full of low-cost manufactured items, this theory does
not seem quite so quaint anymore.
[July 24, 2017] - [ The Risk of a Rapid Onset of Instability - or How to Avoid an Economic Cytokine Storm => Raise Rates 100 bps by Year End. ] Interest rates will have to
normalized at some point here in the quite near future. In the Kitchener-Waterloo area, for example, a small urban region in central southern Ontario, near where we are based, the *average* selling price for a residential home has risen over 40% from
last year (data for May, 2017). In many cases, the price rises are much more than this. This is solid evidence of a developing asset-bubble, which is being driven by long mortgage rates below 3%. Bank stocks are one of the few asset classes
that will benefit from rising rates - and the rates will have to start rising soon, if we are to avoid a runaway bubble-and-burst scenairo, like the Japan situation of the 1980's. The banks themselves here are required to maintain very high levels
of capitalization, and they protect themselves with aggressive income verification and property assessment efforts on each mortgage granted, but if you review historical interest rates, long-term mortgages below 3% are unheard of. But that is our situation
now. Money is flowing into residential housing, because it cannot find a safe and/or reasonable return anywhere else. Long Canada's are in the 1% range, and savings products at the banks offer negative yield (when adjusted for inflation). Many folks
remain distrustful of equities. (USA had the 2008 Junk-Mortgage Backed Securities crisis, Canada had the Nortel meltdown, which put many people off the stock market forever.) So modest suburban houses are selling for $700K to $800K, nice ones for
over $1 million. Modest farm and rural properties sell in the multi-millions, and the real-estate agents complain they have no inventory. Short rates need to be upshifted at least 100 basis points by year end, just to maintain economic stability,
IMHO. This will goose the Cdn$, and hurt exports, but it will damp down things enough to keep the economic tempest at bay. If oil prices stay low as they are now, this upshift in rates will not hurt too much.
What we don't want
is to face a scenario where oil goes back to over $100/bbl at the same times as rates need to be raised. I have long maintained that the historical pattern one sees with rate-rises, is that they move *with* stock prices - rates go up, as equity prices
rise - with the underlying driver being improvement in the rate of return on capital. And that improvement in the return on capital comes from a mixture of increased educational level and increased productivity of the workforce, improved technology and technical
deployments, upgraded economic infrastructure, allowing better communication and transportation of production, and better capital *mobility* - investment money can find and move towards opportunities where it gets the best results. These improvements
often seem to show up as rising returns - so that both interest rates and stock prices move higher.
Our governments should not be afraid to raise short rates closer to reasonable levels. I fear the distortions being created
by the big money-supply expansions, and the very-low rates and yields, will hit us all in a very non-linear fashion. And those who say there is no or low inflation, are just not looking at real prices. Gasoline is $1.10/litre. I had
a tooth removed recently and it cost me almost $1000. I had the brakes repaired & replaced on a Ford F-150 pickup truck, and it was over $1000. A new car-battery for another vehicle was almost $200. The childhood home I grew up in, that
my father built for roughly $35,000 in the mid-1960's, would sell for well over $1 million dollars, if it came on the market today (this is a conservative estimate, based on selling prices of similar nearby homes). [Calc. the internal rate of return
on this.. 1965 to 2017 => 52 years. Assume 7 % annual inflation: 1.07 ** 52 = 33.725, so take $35,000 * 33.725 and you get $1,180,375, which is probably what the house would sell for today. You have here (ignoring maintenance, upgrades, etc.)
a 7% rate of inflation annually, over the 52 year time period. Some more real prices: My father bought a new 1972 Pontiac LeMans in 1971, for just over $3000 (I think it was $3056. 2017-1971 is 46 years, and 1.07 ** 46 = 22.473 factor.
Take 3056 * 22.473 and you get $68,677.49, which is about what a new GM sports car of present day would list for in Canada. So again, 7% annual inflation looks to be about the right estimate. Anyone who seriously argues inflation is not well over
5% is just not looking at real prices for actual things like cars and houses.]
And I had a glass of beer at a bar very recently, and it cost $7.00. And should I decide I need to buy a *new* pickup truck - I just looked at the
dealer where I bought the one I have now - and the new ones are *over* $70,000! You may own your property mortgage-free, but be prepared to take out a mortgage to buy your new truck!
We are already seeing the clear beginnings of a
developing runaway-inflation. It is only by fiddling the raw price data by making "hedonic adjustments" that the government statistical agencies can maintain the illusion that we are not already experiencing dangerous levels of inflation. And of
course, prices are moving higher faster than salaries and wages. There is a plan to raise the minimum wage to $15/hr, but all that will do is hurt employment opportunities for young, entry-level kids trying to get their first real jobs.
I have direct experience with the economic collapse of the mid-1970's, as I did detailed research on price levels at that time. We had had the "oil shock", and watched in horror as the Americans tried to control gas prices by legal fiat.
(Gas stations had no gas - long lineups were everywhere as fuel retailers and mid-stream oil companies were asked to sell below cost. Comically stupid, but also tragic. In Canada, Trudeau (Ver. 1.0) created the Anti-Inflation Board, and brought
in wage and prices controls, after promising in the election campaign that there would *not* be a wage-and-price control program (he lied.) Also comically stupid, and also tragic. But the key learning experience for me - which I pass along here
- is that inflation is *really* bad - and it cannot be ended by legal foolishness and government programs. The awful inflation of the 1970's was ended in 1980, by jacking the short and long interest rates up to +20% - and that was the official
rates for things like gov't bonds! It was *very* harsh - yet very effective and necessary - medicine, and it killed a lot of businesses. But it also solved the problem, and the 1980's were a boomtime for everyone, everywhere, as the value
of money could be trusted again - at least for a while.
We now have the flip side - near-zero rates, and yet, no runaway inflation. Yet. But when it begins, it may manifest differently than the oil-shock of the 1970's. We have
never had a complete loss-of-confidence in paper money - at least not since France in the 1700's - (the John Law experiment with the first paper currency), but that remains a possible outcome. Unwise people mock Bitcoin and other distributed-ledger virtual
non-state currency. But look at how "virtual" our money and our assets are now. Does anyone anywhere actually hold physical share-certificates anymore? Are those shares really in your portfolio? I can access the bank's website, and
they used to send me paper statements (but now I get .pdf files instead). The shares are just digits in datafiles. Bernie Madoff sent out paper statements to his "clients" (victims), but they were lies.
I trust my bank (and my bank
stocks). And private American business seems honourable, and the New York Stock Exchange has the best and biggest and probably most fair securities market in the world. But the various governments in the USA are another matter. They always
seem to be seizing private assets for one reason or another (the Wall Street Journal would publish page after page of the cash taken from people at US border crossing and in police raids. Apparently, in the USA, just having a lot of cash is somehow sufficient
proof that you are "money laundering" or some such nonsense.) So, your money is almost always neither physical, nor safe, nor even really protected by law anymore. And it is certainly not backed by gold or silver or any physical thing like
that. In the United States, the government can take anyone's wealth by just passing a law.
So when I look at history, and study how easy it is for things to get really bad, really quickly, I remain concerned that a non-linear reactive
response to modern American law that seems to characterize that place, might occur and affect us here on this side of the border. But we are joined at the hip to these people, and thus must accept these risk factors like it or not.
If one studies
how easily, and almost accidentally, the entire European nation-group (and then us, of course as well), basically fell-into the First World War, it is very curious and disturbing. A minor terrorist incident was escalated quickly into a big mass mobilization.
The mobilization was viewed with fear and loathing, and reactive mobilizations quickly occurred in other countries. Once everyone had mobilized, that path to war was complete. Do you build a road, and then not use it? Patriotic drumming
and tub-thumping began, and happy, healthy young men rushed to join up, to be part of an adventure that was expected to last only a couple of months. Those that did not become corpses, often returned maimed and broken. The resulting carnage was on a
scale that is difficult to imagine. And when the entire absurd, insane, pointless, stupid slaughter was ended in 1918, the returning soldiers took a horrific virulent influenza strain home with them, that by modern estimates killed between 50 and 100
million people worldwide.
The so-called "Spanish Flu" of 1918 was more deadly than the war. I did a small study recently on the lethality and other features of the 1918 flu pandemic, and I believe it was seriously under-reported - basically
because the data-gathering tools just didn't exist in many parts of North America, and were non-existant in several other nations. The illness came on so quickly, and was so lethal, that many who died were not officially counted. One specific example:
Four people were playing cards. One said she did not feel well, coughed a bit, and lay down. By morning, all 4 were dead. In Canada, there were whole villages where everyone died. In the same way that the Securities Laws and Federal
Reserve were developed in response to the 1929 stock market crash, public health measures and proper data collection on citizen health, seems to have been developed in response to the 1918 Flu Pandemic.
One thing that appears to have made the
1918 flu so lethal, was that it hit *healthy* people hardest, and came on very fast, as it is thought to have provoked what is now termed a "cytokine" storm, or a massive, intense immune system response, which causes one's lungs to fill up with fluid very
quickly, so that you basically choke to death on your own pneumonic response to the pathogen.
My whole thesis here, is that weirdly awful, non-linear negative responses appear to be not just not-uncommon - but actually seem to be how things play out,
if there has been a previously long period of stability. We need to look at history, and see this a bit more clearly. The longer we remain in this weird-zone of low rates + fiat money-pumping, the greater is the likelyhood that significant
destabilization could occur. And it might happen at "internet speed", I suspect. And if you couple this unhealthy zero-rate-of-return-on-capital world, with the abuse of our traditional legal protections (the actions of the US CIA and the
NSA provide good examples of what I am talking about) and the ongoing militarization of both the Middle East and the Far East, it seems as if we are tee-ing up a reactive response that no one really wants at all. While North Korea tests nuclear
weapons, and launches multi-stage ballistic missles at Japan, the left-leaning Americans attempt to bring down their President for talking with the Russians during his election campaign. To me, this shows a degree of outright insanity in the US political
process. (I *want* the US President to have a good working relationship with President Putin of Russia. Why is their dialogue even an issue?) This curious level of dysfunction in America at this point in time also provides motivation for a rapid
loss-of-stability scenario. If America and Russia launch rockets and bombs at each other, they fly over my land. No one benefits from that kind of conflict. No one.
We need to re-examine the "stabilization policies" of the 1960's
and 1970's, and recognize the virtue and necessity of our governments taking counter-cyclic actions to enhance the prospects for trans-national economic and social stability. I am not arguing that we should hit the brakes - just maybe ease up a
bit on the gas before we have to take the next curve on this rain-slicked highway-to-hell that we are accelerating along on as we grimly rush towards our futures. We have our white-knuckled hands gripped tightly to the wheel, our teeth-gritted firmly
together, our eyes a little bleary from lack of sleep. The radio is turned up too loud, and the window is open, so the cold air keeps us awake. Are we there yet? Has this been enough *stimulation*? Or do we have to keep printing
more money to give to rich people in New York, to keep the US economy humming? How much longer will the citizens of this planet actually tolerate this America? Another 50 years? Or maybe only another 5? Or maybe it happens
next week? Will it be North Korea that launches first? Or maybe North Carolina?
I am unable to see much in the near future, but curiously, it is that timeframe that concerns me the most, for there seems to lie the greatest uncertainly,
and the most risk.
[June 25, 2017] - The Xerion-based Neural-Network experiment, using the boolean jump-delta table is producing interesting results. The approach looks as if it might be useful. The information it provides is
clear and actionable. Of course, one needs a lot more data to say anything with any legitimate scientific validity at this point. I will need to evaluate the results in conjunction with a methodology for interpretation, that can be tested against various runs
of randomness. I will need to see the network produce consistantly better-than-random results, before I can assert that it is providing value. And of course, the human world is also changing, so I may find that I am trying to hit a moving target, perhaps unsuccessfully.
The NN-AI results, provided by the boolean-table driven neural-network, have to be looked upon with suspicion. The AI might just be getting lucky.
But having pointed out this important caveat, the results do look interesting, and are explicitly keeping
me in a trade that I probably would have exited. Here is the data-screen from the new AI-box, (with the nice wide-screen, which gives me more visual real-estate.). The target security goes ex-dividend on Monday (June 26, 2017), so of course, it will show a
negative delta of 1.27. Despite the actual security price moving up, the AI has shifted its view down below the zero-line, on the most recent data, and I find this curious and a little surprising. This is what it is, of course, supposed to do, but I rather
suspected that it would not do this, and would be "surprised" by the down-turn on Monday, which I know will show up in the data (I have not tried to use prices that were "adjusted" for dividends). The raw price data is current to June 23, 2017, and the most
recent price-data built into the boolean jump-delta table by MAKECASEBOOL program, is to close of June 22, 2017. And the NN-AI has flipped to negative, with the MarketNet network generating a -0.533 value for the June 22, 2017 target. (See both the "compareMarketNet"
output, and the GNUplot "plotValues" graphic.)
If you were using the NN-AI as the "old, wise fellow" it is conceptually designed to be, you would have sold your position in the target-security on Friday, somewhere in the upper 107 level (say, 107.70).
Mkt close of 107.38 on June 23rd (Friday), means that this strategy looks already to have been successful, as the target will open near 106.11 on Monday morning, all else being equal.
My objective now is to produce an evaluation methodology that lets
me assess both NN-AI effectiveness, and expected profitability. The idea is to see if there really is an *edge* being created here, or am I just curve-fitting randomness. We will try not to be fooled here.
[June 22, 2017]
- Update on the Neural-Network results. Four photo's below. Using photos is just about always the best way to explain a process, or describe an event. These results are *very* preliminary - but remember, life is short, and it is also what
usually happens while you are making plans. We need to move fast now, no? So, here are some quick thoughts on how the AI is doing...