Summary: Read this [0] Rescue from Democracy
http://www.pei-intl.com/TOPICS/MELT0917.HTM
Almost a decade ago I used to be a machine learning expert on top of having
a lust for global, technical market analysis. George Soros' "Alchemy of
Finance" was a small candle in the hurricane of changes after the 1987
crash. Soros was the person, for those who don't recall, who made upwards
of a billion dollars in a few short hours one day in the international
currencies market shorting the British Pound. I remember this day
explicitly; about a decade ago I had my commodity account bootstrapped to
the hilt trying to short any of the European commodities. When it came
down to it, there but for the grace of chance I am not a
multi-millionaire. I evaluated shorting the pound, but the contracts were
too expensive. My other choices were German Mark and the Swiss Franc. The
two of these currencies essentially are indistinguishable from a technical
standpoint, so of course I shorted the Swiss Francs because I could get more
contracts with further away strike prices for so much cheaper. I picked the
nearest month, and shorted 20 contracts. Day 1 nothing happened; day 2
increased volume of trades but no price change, day 3 Soros shorts tens of
millions of British pounds and uses the other European currencies options to
hedge, particularly the Swiss Franc whose currency trades record volume but
otherwise has no other price changes thus missing the target time frame,
blowing through the target price for the next month's contract. So the
world is full of what-ifs, and it's no surprise that Great Britain's
favorite poem is Rudyard Kipling's "If", but only if I would have shorted
the pound or bought less contracts further out.
My technical commodity trading often went round the clock. My former game
theory professor (Alain Lewis) came up with a theorem that markets are
quantum. You have the theory of supply and demand that says price is the
equilibirum between the two. You have the Arrow-Debreau theory that markets
are actually multi-variable algebraic constructs that at any point along a
supply and demand curve, there is an algebraic construct that can describe
the curve. This is the theory that most modern day AI and neural network
based systems commodity analysis systems are based on. The problem with
them is that they are too slow to respond in the face of overwhelming
evidence and rely too much on historical data. Business Week sums up their
failure with an excerpt from this month's cover story "Misfire"[1]:
"August (1998) may go down as a landmark in high-tech money
management; Investors lost billions, and 'rocket scientists' lost
their credibility."
In the theory of quantum markets, every price is a cumulation of unknown
variables. Price changes are immesurable, price targets are predictable.
The hard part translating this into a 'real' workable model is that it's
very complex to predict a target price, it's very complex trying to predict
a target time, and it's infinitely more complex to predict both a target
price and a target time which is what you do with commodity options. Our
way of dealing with complexity combined a hill-climbing algorithm which
managed a dynamic set of genetic-based learning algorithms using standard
analysis to evaluate the likelihood that a certain commodity or currency
would hit a target price. It was a great time in my life, and if I ever
could go back to doing that again, I'd seriously consider it. I still track
the complexity theory results from the Santa Fe Institute [a] and my all
time favorite site on the WWW is still the Princeton Economic Institute's
site which combines the best of the best technical models with the social
analysis of world economic markets [b].
Over the past 6 months there's been a tremendous amount of speculation that
the world is heading to a overwhelming meltdown of captialism. Martin
Armstrong in a September 16th analysis asks the question "Do we need to be
rescued from Capitalism?" which sends shivers down my spine and chills down
his. Armstrong counters Soros's call for government control and
intervention in the world markets as outlined in "The Capitalist Threat"[2]
where Soros asks, what sort of society do we want and then goes on to argue
that maybe it's best to deny capitalism to the very same population and
environment that produced him, the capitalist's capitalist. Laissez-faire,
in his revised view, may in fact be a threat to a globally open society.
Soros argues that when people speak of the global economy, they are really
speaking about global capitalism. He argues that this system is not
perfect, and in fact endures some deficiencies [3]:
1. Uneven distribution of benefits
2. Instability of the financial system
3. Incipient threat of global monopolies and oligopolies
4. Ambigious role of the state
5. Question of values and social cohesion
An Open Society does not mean free exchange of goods and services, but free
exchange of ideas. In my view, any restrictions made on the free trade of
goods and services is an attack on free trade of ideas. It's no secret that
the recent Russian instability was caused by and uneven distribution of
benefits, the changing role of the state, and the explosion of questionable
values in a new society and fragmented cohesion by the resurgence of
different ethnic identities. Can you generalize to the global economy from
this? A single data point is hardly significant. There's no doubt that the
Russian oligarchs clearly had a hand in the destruction of capitalism in
Russia, but then the DeBeers oligarchy certainly is a counter-example which
resulted in a more stable financial system, less government control, and a
shared value system across all cultures. So, should we throw the
baby out too? [4]
Do Soros' premises demand the elimination of what Adam Smith calls the
"Invisible hand of the market"? Capitalism attacked on a second from comes
from the Schlefer article [5] who says that Adam Smith's open competion
market was actually mischieviously misquoted and that the original variant
conveys an opinion opposite of the free reign of open markets.
Every individual endeavors to employ
his capital so that its produce may
be
of greatest value. He generally
neither
intends to promote the public
interest,
nor knows how much he is promoting
it. He intends only his own
security,
only his own gain. And he is in this
led
by an invisible hand to promote an
end
which was no part of his intention.
By
pursuing his own interest he
frequently
promotes that of society more
effectually than when he really
intends
to promote it.
Schlefer argues that Smith did not argue that individuals pursuing their own
interest also promote the good of all society. He argues that Smith say the
potential for large capitalists to seek high profits which have the
potential to corrupt and impoverish society. Adam Smith, previously being
a professor of moral philosophy, attributed morals and values to people's
motives for acting in their self-interest in a open capitalist market.
Global capitalist doomsayers point to Smith's intereventionisms on moral
grouds and proof that tax burdens collected in a free society should be used
to address the poor getting poorer, suffering and pain [c].
All this recent speculation about uncertainty and collapse has led many of
the world's most enterprising capitalists to decide to 'set' societal norm
to be a blandish socialism pursued through interventionist government that
places no restrictions on markets when profits are 30-50%, but doesn't
hesitate responding at the first loss of a dime. Global insurance policies
for fund managers, IMF bailouts for failed governments, encouragement of
risk and bailouts at taxpayer expense. Devaluations of currencies are in
fact taxes. The current bailout of world markets is through devaluation of
currencies, but to say that the Asian crisis or the Russian crisis is a
'currency' crisis is disengenuine. Back when I was trading currencies, I
was always better at predicting shorts than longs. Anytime the G7 tried to
bail out a currency, you always bet against them. $1 trillion of most world
currencies versus a few measly tens of millions of dollars was always
ridiculous. From this interventionist view comes the thought that
capitalism is fundamentally flawed and does not result in equilibrium, but
at times market collapse.
Anways, as I've posted before, the Russian collapse has been a tremendous
point of interest for me over the past several months. I think it's an
excellent example of how not to pursue a globaly policy of intervention and
regulation. As mentioned in my previous Russia posting, bailouts have not
resulted in stability, but only capital flight out of the country. This is
the part of the Russian Lesson that is most useful, the role of the state
should NOT be to eliminate all risk or to bail out excessive risk. What's
next for them? Short term panic? Civil war? [d] Deflation? I can only
conclude with the feeling that interventionist policies are
self-prophesyzing, self-defeating and that contrary the popular speculation,
tales of capitalism's death have been greatly exaggerated.
Greg
[0] Rescue from Democracy http://www.pei-intl.com/TOPICS/MELT0917.HTM
[1] Business Week - "Misfire" (subscription only)
http://www.businessweek.com/
[2] Capitalist Threat
http://www.theatlantic.com/issues/97feb/capital/capital.htm
[3] Death
http://news.bbc.co.uk/hi/english/talking_point/newsid_172000/172663.asp
[4] Global Ideas http://www.theatlantic.com/issues/98jan/opensoc.htm
[5] Adam Smith Misquote http://www.theatlantic.com/issues/98mar/misquote.htm
[a] Santa Fe Insitute http://www.santafe.edu/
[b] Princeton Economic Institute http://www.pei-intl.com/
[c] Oingo Boingo - Capitalism
http://www.obscure.org/~vlad/lyrics/oingo.boingo.html
(included here)
@SONG: Capitalism
There's nothing wrong with Capitalism
There's nothing wrong with free enterprise
Don't try to make me feel guilty
I'm so tired of hearing you cry
There's nothing wrong with making some profit
If you ask me I'll say it's just fine
There's nothing wrong with wanting to live nice
I'm so tired of hearing you whine
About the revolution
Bringin' down the rich
When was the last time you dug a ditch, baby!
If it ain't one thing
Then it's the other
Any cause that crosses your path
Your heart bleeds for anyone's brother
I've got to tell you you're a pain in the ass
You criticize with plenty of vigor
You rationalize everything that you do
With catchy phrases and heavy quotations
And everybody is crazy but you
You're just a middle class, socialist brat
From a suburban family and you never really had to work
And you tell me that we've got to get back
To the struggling masses (whoever they are)
You talk, talk, talk about suffering and pain
Your mouth is bigger than your entire brain
What the hell do you know about suffering and pain . . .
[d] Dead Kennedy's Holiday in Cambodia (included here)
http://www.nh.ultranet.com/~brandx/lyrics/dk1.html#Holiday
Holiday in Cambodia
So you been to school
For a year or two
And you know you've seen it all
In daddy's car
Thinkin' you'll go far
Back east your type don?t crawl
Play ethnicky jazz
To parade your snazz
On your five grand stereo
Braggin? that you know
How the niggers feel cold
And the slums got so much soul
It?s time to taste what you most fear
Right Guard will not help you here
Brace yourself, my dear?
It's a holiday in Cambodia
It's tough, kid, but it?s life
It's a holiday in Cambodia
Don't forget to pack a wife
You're a star-belly sneech
You suck like a leach
You want everyone to act like you
Kiss ass while you bitch
So you can get rich
But your boss gets richer off you
Well you'll work harder
With a gun in your back
For a bowl of rice a day
Slave for soldiers
Till you starve
Then your head is skewered on a stake
Now you can go where people are one
Now you can go where they get things done
What you need, my son.
Is a holiday in Cambodia
Where people dress in black
A holiday in Cambodia
Where you'll kiss ass or crack
Pol Pot, Pol Pot, Pol Pot, Pol Pot, etc.
And it's a holiday in Cambodia
Where you'll do what you're told
A holiday in Cambodia
Where the slums got so much soul.