Category Archives: Trading & Asset Management

Trading comments and observations

Trading and Investing -Here's what I've Learned

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I've been investing since the late 70's and trading actively since the late 90's. I've read 6 hours a day for more than a decade. I've lost lots of money. I've made (a bit) more than I've lost.

There are no "trading secrets" just weak signals embedded in lots of noise across many domains (capital markets, math, psychology etc.) and big markets are (mostly) efficient . I've written about how Paul Tudor Jones categorizes trading systems. I copied him when I consider different approaches. For what it's worth, here's what I've learned that took me too many years to extract from the noise.

10 Insights that Improved my Trading

1) All trades make or loose money because of either "timing" or "co-destiny" with the security.

  • Sell/BuyMore winners vs Sell/BuyMore loosers are implementation details of 1) both work when used properly

2) Indices are more efficient (harder to trade) than individual stocks or commodities and are just an algorithm for combining those underlyings.

3) Forecast time and price separately.

  • The driving forces around each overlap but are mostly different

4) "Value Investing" = make your money on the entry timing "Momentum Investing" = make your money on the exit timing.

5) Use the markets to forecast the market (COT, Term Structures, Sentiment, Sectors,Company Valuation etc.)

  • Markets are smarter than you are

6) Understand whether prices are being driven by credit or money. Money has "cleared" credit has not (yet) and because the financial economy is much larger than the real economy (10x) it can cause fundamentals to appear to stop working.

7) Don't use pre-1971 (fixed-exchange rates) assumptions, a market can be rising in one currency while dropping in another creating different motivations.

8) Fitting vs. Forecasting

  • You can fit a curve to random data but it won't forecast the future

9) Bet sizing is Job 1.

10) MPT is right for everyone but wrong for anyone.

  • Ole Peters proved a mathematical mistake was propagated into current economic theory that has yet to be reconciled, unlike physicists who formalized whether a system is ergodic in their work.

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Why your biggest political blindspot is not understanding how Government economics differs from yours.

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You don't need to understand an internal combustion engine to drive a car, and you don't need to understand a monetary system to participate in an economy.... BUT TO FIX AN ENGINE OR ECONOMY YOU DO.

I cringe when I see the majority of people believing what I did for most of my life, that our government borrowed to get money to spend (like we do).  THEY DON'T. I've written a little bit about this in How to Think About Economics.

Rebooting the U.S. Economy in a Thought Experiment

Pretend there is no money and we have to reboot the economy,  lets think  through this...

  1. The US gov't has a monopoly on creating money (a "fiat" monetary system)
  2. They "spend" the money into circulation (buy stuff from us) or "give" the money to us (social benefits)
  3. If they tax the same amount back (balance their budget)  WE HAVE NONE LEFT
  4. Therefore: The U.S. government Deficit MUST EQUAL our savings to the penny!


State and Local government economics are the same as you and I, they must "earn" (tax) their money since they cannot create it like the feds.

So applying the same economic rules and thinking for your household, business or state government DOESN'T APPLY TO THE FEDERAL GOVERNMENT when you understand the mechanics of "Money Issuers" vs. "Money Users".

Warren Mosler is a guru of "Modern Monetary Theory", and wrote a short book called  "The Seven Deadly Innocent Frauds of Economic Policy"

This book, shows why, in the fiat U.S. monetary system, the following  are FALSE understandings:

  1. The government must raise funds through taxation or
    borrowing in order to spend. In other words, government
    spending is limited by its ability to tax or borrow.
  2.  With government deficits, we are leaving our debt burden
    to our children.
  3. Government budget deficits take away savings.
  4. Social Security is broken.
  5. The trade deficit is an unsustainable imbalance that takes
    away jobs and output.
  6. We need savings to provide the funds for investment.
  7. It’s a bad thing that higher deficits today mean higher
    taxes tomorrow.

WOW... are you saying the federal deficit is a measure of how much money WE (the non-federal government entities--including their employees) have?     YES THAT IS WHAT I'M SAYING.   This is true for all fiat monetary systems which the U.S. has had since ~1933.  Remember the trillion dollar coin?  YES they can mint a $T coin but....this is all about DISCIPLINING government spending, there are no operational reasons.

In How to Think About Economics one of my takeaways is:

Ben Bernanke (Chairman of the Federal Reserve) said during a Congressional Testimony "... with all due respect Senator, the US will always pay it's bills unless you direct the Fed to not make the computer entry"

Why did we do it this way and what the hell is money anyway?

Reading about the history of money is 1/2 human psychology and 1/2 the rise and fall of governments and the interaction of politics, money and banking. I've read many books but recommend "Money,  the unauthorized biography" by Felix Martin.  From the Silicon Valley's of the ancient world, to Russia's attempt to abolish money and banking, to today's Vampire Squid (Goldman Sachs) and cryptocurrencies, Felix tries to convince you how inherently political money is. (This is a blind spot of bitcoin geeks who miss the transitive property:  money=power and  politics=power therefore money=politics).

Island of Yap highly developed Stone Money System


"There was in the village near by a family whose wealth was unquestioned---acknowledged by everyone--- and yet no one not even the family itself had ever laid eye or hand on this wealth...known only by tradition...the past two or three generations...lying at the bottom of the sea"

--- From "Money" by Felix Martin


Over the last few hundred years economists have generally agreed that money has 3 functions:

  1. A unit of account   (measure things in the unit of "dollars, yen or euros")
  2. A medium of exchange (equate  to  "dollars" and use them instead of barter)
  3. A store of value (store up my labor etc. in dollars or shekels  to spend later)

This is a useful framework because it gives you 3 axis to think about how politics and money interact. Examples include:

Example 1:  Monkey with the unit of account

The Consumer Price Index is used to index wages and Social Security benefits, hence by growing it slowly, the government "saves" money, this is why the measurement keeps changing. computes the CPI using the same algorithm as 1990 to show how it's been lowered.  A POLITICAL MOTIVE?


Example 2: Monkey with the medium of exchange

The cashless society is being pushed as a solution to big crime (money laundering). But physical money has a property no other representation has, ANONYMITY FOR ALL CITIZENS. All electronic transactions enable, the federal government(s) to  track global transactions and enforce new international tax regimes such as described here and here. A POLITICAL MOTIVE?

Example 3: Monkey with the Store of Value

The government gets to spend money first,  they usually issue debt to economically "sterilize" their expenditure. If the central bank purchases the debt by printing money, it's  "monetized" (didn't pull the same amount of money out of circulation).  If a "primary dealer" bank buys the debt the bank gets the first spend of all interest payments.  If the supply of money and credit grows faster then productivity and population (inflation targets), then the value of the currency declines and the first to spend it receives a purchasing power advantage. Rome did this by shaving the amount of gold or silver from the coins. Avoiding deflation or A POLITICAL MOTIVE?


Modern Monetary Theory Teaches us:

  • Federal Spending is limited by inflation. Government debt serves as:  a) a check and balance on spending, and b) a risk free asset in the private economy, it is not operationally necessary.


  • Federal governments issue money, everyone else (including state and local government) use it. Hence state and local deficits are a debt burden on our children, federal is not.


  • Deflationary forces (aging demographics + globalized labor + technology+high debt), moves money from spending to savings.


  • When the deficit is growing (and money velocity is not slowing down), then money should increase GDP as it enters the economy.


Money Velocity (GDP/Money Supply) Measures how many times a dollar gets spent in a year. Note the drop in velocity during recessions, especially 2008-Now.

  • Money is Politics


If you haven't watched this....  watch it...  How the Economic Machine Works.


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How to Think about Economics

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When talking to executives, technologists and marketing people I'm surprised when they over-simplify  how the global economy functions, and is changing. Here are some key understandings and implications I use when analyzing events.

My framework for recognizing the forces impacting businesses is to isolate three economies and define them as below.

1) Global Economy - how countries settle trade balances (international clearing)

2) Financial Economy - disk drives and filing cabinets with  "claims" on the real economy

3) Real Economy - making, buying and selling stuff

Taking them one-at-a-time with  key takeaways...

GLOBAL ECONOMY - 4 important things to know about the Global Economy...

global economy

1) Prior to 1971 there was an agreed-upon system (1944 Bretton Woods fixed-exchange rates) but in 1971 things went rogue (US dropped peg to Gold and currencies "float") and many policies have STILL not adapted to the new structure.

     Takeaway: I thought Foreign cars held their value better than US cars but it was the US dollar, not the cars, that was changing. Even Congressmen don't get how rapidly rates change (up to 20%/year, and 100% over 5 years for the Yen) and how Global Capital Flows affect everything.

2) Floating exchange rates were intended to be market set, but countries game the system by manipulating (pegging), here's 34 doing it

      Takeaway:  Countries create mercantile policies that "advantage" them in global markets for DECADES. But markets will EVENTUALLY clear. (China and Germany)

3) The US is the "reserve currency" so transactions occur (not just price) in dollars. Therefore the US must create enough "working capital" dollars for both the US and the rest of the world's International Trade (~50% of US Dollars are in the USA and ~50% overseas with the US share of global GDP at ~20% now, ~31% in 1971 and ~40% in 1941)

     Takeaway: Policymakers make mistakes since changes in foreign demand for US$ can be as  large as monetary policy impacts on the supply. QE and other policies can cause foreign bubbles but subdued US impact with all the moving parts.

4) In 1969 a new global "unit of account" called "Special Drawing Rights" SDR's were set up to be a "worldwide reserve currency" . In fact, the US Post Office accepts SDR's as payment!

     Takeaway:  The global monetary system is being restructured. Expect unintended consequences and economic hiccups.

FINANCIAL ECONOMY - 3 important things to know about the Financial Economy...

financial economy

1) 10x bigger than the Real Economy (Bain & Co. estimates globally ~$600T financial assets supported by ~$63T GDP )

      Takeaway:  The Financial Economy can jerk the real economy around with bubbles and busts even when the real economy looks good. E.g. 2000 tech, 2008 mortgage, 2015 shale oil etc.

2) Since the early 1900's manipulating the financial economy (e.g. capital gains vs. income tax rates, IRA's, Mortgage Interest deduction etc.) has become the PRIMARY tool of Politics.

      Takeaway:  Policy changes provide huge business shifts. E.g. Tax credits built Hollywood, Obamacare and the Insurance Companies, tax credits and Solar etc.

3) Since 1971, the Federal Government (NOT State or Local) can Print as much money as they want (they don't need to borrow). Ben Bernanke (Chairman of the Federal Reserve) said during a Congressional Testimony "... with all do respect Senator, the US will always pay it's bills unless you direct the Fed to not make the computer entry" They are limited by inflation which is a function of (global) demand for US$.

"Private sector SAVINGS is equal to the Federal DEFICIT to the penny!" -Warren Mosler

The cash (ASSET) in your pocket shows up as a LIABILITY on the Federal Reserve's Balance Sheet!  Money is scorekeeping, home economics doesn't apply to the Federal Government they  MIRROR the private economy.

      Takeaway:  We've had ~12 balanced budgets since 1940, there is no intention of ever repaying the federal debt (nor is it necessary) Federal interest expands the money supply, but allows financial intermediaries to allocate the expansion,  growing the Financial Sector. Shrinking deficits slows GDP if money velocity remains constant.

REAL ECONOMY - 3  important things to know about the Real Economy...Vespa

1) It is jerked around by the Financial Economy expanding and shrinking credit

      Takeaway:  See Financial Economy 1-4

2) It is jerked around by the Global Economy moving money into and out of the US. (Globalized Finance)

      Takeaway:  See Global Economy 1-4

3) Export / Import financial data collection was built during fixed exchange rates, based on currency not units. Accuracy is a function of exchange rate volatility in any given period.

      Takeaway:  Export/Import to a country expressed in currencies (vs. Units) cannot be compared over time.  Unit trade numbers can be off by 20% with the same $ trade number in a single year!

Ray Dalio of Bridgewater Investments created a wonderful video called "How the Economic Machine Works" Ray clarifies how buying things with money vs. buying things with credit and productivity in the real economy interact.  It's 30 minutes, watch it.

Here's a paper on the same

I hope this helps...

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"JTC1 Moats" TTM Simulation

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14Mar23 " JTC1 Moats" TTM Simulation

14Mar23 " JTC1 Moats" TTM Simulation

JTC1 Moats  is a rotational trading strategy that ranks and selects from a proprietary list of approximately 100 stocks chosen for their defensible market position. It holds 8 stocks (if criteria is passed) and is re-balanced weekly. The system uses the S&P500 Volatility Index (VIX) and weighted averages to time the market. It invests in the iShares IEF 7-10 year treasury ETF during bear markets.

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"JTC1 Moats" 14 year Simulation

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JTC1 Moats  14 Year Simulation

JTC1 Moats 14 Year Simulation

JTC1 Moats  is a rotational trading strategy that ranks and selects from a proprietary list of approximately 100 stocks chosen for their defensible market position. It holds 8 stocks (if criteria is passed) and is re-balanced weekly. The system uses the S&P500 Volatility Index (VIX) and weighted averages to time the market. It invests in the iShares IEF 7-10 year treasury ETF during bear markets.

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Paul Tudor Jones on the InJustice of Income Inequality

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Paul Tudor Jones (PTJ) is a legendary trader  that runs one of the largest  Hedge Funds in the world....Tudor Investment Corporation. He recently gave a TED talk about income inequality. PTJ shows data documenting a 40 year high in corporate profits as a % of Revenue and a 40 year low in the percentage going to labor (Classic substitution of capital for labor). I guess todays corporate leadership doesn't think like Henry Ford who famously paid his employees enough to ensure they could buy a Ford Automobile.

PJT has created an independent non-profit organization that will  poll 20k  Americans annually to  define corporate societal responsibilities that they will use to  rank the largest 1000 US companies.

Interesting that the early comments on YouTube are mostly negative. Commentators seem unconvinced PTJ is genuine. PTJ concludes that historically this level of inequality ALWAYS is corrected via Taxes, Revolutions or War. So is he worried about "killing the rich people"?  Perhaps, but someone of his stature needs to quit the BS that optimizing shareholder value is Smith's invisible hand. Read Smith, it's not.

I've  been inside the core of the Technology business (semiconductors and software) for over 35 years. I see four changes that are creating winner-take-all monopolies by compounding capital much faster than when I started in the 70's...

1) Repeal of Glass-Steagal and conversion from LLC's to Public Companies driving TBTF Banking   the largest corporate sector in total capital and profits.  We have ~$800T in capital supported by a  ~$80T global economy.

2) Knowledge (IP) , when exchanged, creates 2 owners of the same IP. The knowledge economy is a mathematical engine for exponential growth.  Most of world economic history was built upon physical object transactions which does not implicitly create shared ownership.

3) Globalization especially w/respect to the benefits of 2)

4) The flawed assumption of Ergodicity  in economic teaching and policy now well documented as a mathematical error in Menger's foundational book that created "modern" economics, . Lucky money compounds to +infinity but unlucky money stops at zero... game over for the unlucky.

I believe these have created a tangibly different environment than our economic history books.  I agree with PTJ that unintended consequences (inequitable distributions) will not settle out before Capitalism's benefits fail to benefit the majority of the people.


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Paul Tudor Jones: 4 Ways to Make Money

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At the 25th anniversary of the crude oil contract on the NYMEX, Paul Tudor Jones ( ) gave a presentation where he described how he categorizes trading strategies. Here they are with some examples...

1) Specialized knowledge of an Instrument

Stock picking long/short (research analysts)
Floor traders (back in the day)
Insider trading

2) Arbitrage (take advantage of pricing inefficiencies)

NYC vs. London, Cash vs. Futures
Pairs trading (statistical arbitrage or relative value)
Microstructure (Bid/Ask spreads) (HFT)

3) Trend (Momentum) Trading

Trin trading (day trading)
Nasdaq late 90’s
CTA “Trend-followers”

4) Execute at the “Peak of Human Emotions”

Small group of people (Idiot Savants) Exuberance vs Fear
Buffett “Be greedy when others are fearful and fearful when others are greedy”

This is a useful framework...if it's good enough for PTJ it works for me.

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Diversification 101 - why 8 is enough

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diversified eggs

Harry Markowitz  ( ) is credited with the comment that diversification is the only free lunch in investing.

Mathematically diversification is about UNCORRELATED movement of asset prices. There are many ways people tackle this including MPT,  Post-MPT,  risk-parity and others.   I focus on the number .707. (I used it when designing microprocessor chips worrying about how many electrons I needed to get in place on time)

It is a VERY useful rule of thumb when combining assets with random returns (iid) that have LOW CORRELATION. Each time you DOUBLE the basket of assets the variance (standard deviation of returns) will be reduced by .707.  For example...

  • 1 Asset  volatility  N
  • 2 Assets volatility ~.707 * N   or   30% less
  • 4 Assets volatility ~.707^2 * N  or 50% less
  • 8 Assets volatility  ~707^3 * N  or 65% less
  • 16 Assets volatility ~.707^4 * N or 75% less
  • etc.

Notice the reduced bang for the buck. The reality is that it is VERY difficult to find 8 uncorrelated assets and getting harder with globalization (global equity markets have become more correlated the last 15 years). The biggies are Cash, Equities, Bonds, Real Estate, Absolute Return, Managed Commodities and Gold.

I don't like it when large  funds claim higher diversification because they have small positions. This is usually driven by liquidity constraints rather than diversification optimization and pushes returns to the mean.  Yes a bankrupt company is a RISK FACTOR that gets diluted with large positions but equities are equities. Buffett has said 10 and Cramer often works around the 8-10 range.

So focus on getting close to 8.  Nine won't help that much and the leap to 16 is tough even for Bridgewater Associates ( ) and David Swensen ( ) did well by adding just one (timberland) to the Yale endowment.

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