The Dangers of Going on Tilt

One of the most self-defeating attitudes I've found among some traders is that it is somehow competitive and even desirable to "go on tilt". My experience is that traders on tilt are frustrated; they fight market movement and overtrade out of emotions. In fact, I can't think of a time when I've seen a trader on tilt actually trade well and make significant money. It always ends badly.

That is very different from being motivated and psyched up. The motivated trader is responding to anticipation: the expectation that comes from seeing markets well and looking forward to taking advantage of that vision. The trader on tilt is simply frustrated by prior events. Tilt is the epitome of being reactive, not proactive in outlook.

If you doubt that tilt is an undesirable state, imagine yourself as a patient in an operating room. Your surgeon has begun the prep for your surgery. With each successful step, he pumps his fist and yells out. When a portion of the preparation doesn't go well, he loudly curses, throws his surgical instruments, and yells at the OR staff.

Is that the surgeon you want for your procedure?

You get the point: consummate professionals don't go on tilt. Ever. Not in the operating room. Not in the cockpit of a plane. Not on the battlefield leading troops. Not anywhere there is significant risk. Professionalism means staying task focused and dealing with powerful emotional responses later.

After all, would you turn your money over to a money manager who swung high and low, hot and cold, with each gain and loss in your portfolio? So why manage your own money that way?

Disincentives from Health Reform

Here is my column in tomorrow's NY Times about the marginal tax rates implicit in the health reform bill making its ways through Congress. Let me add a few additional observations on the topic.

1. Here are the CBO numbers on which the article is based. Unfortunately, the Times did not run the table of implicit marginal tax rates that I gave them based on the CBO numbers. But the example I used in the piece (an implicit tax rate of 23 percent) is representative. For lower income levels, the implicit marginal tax rate is even higher. Between $42,000 and $54,000, the implicit marginal tax rate from health reform is 34 percent.

2. When CBO estimates the budgetary cost of such bills, it holds GDP constant. If you think (as I do) that large increases in marginal tax rates tend to depress labor effort and thus GDP, then you should be wary of claims based on CBO scores that the health reform bill is deficit neutral. Lower GDP will mean lower tax revenue and thus a larger budget deficit.

3. How much do people respond to tax rates? Economists differ in their answer to this question. The latest thinking on this topic, by my Harvard colleague Raj Chetty, indicates that the elasticity of taxable income with respect to (1-tax rate) is about one half. So, for example, if a person starts with a marginal tax rate t of 0.3 and health reform raises it to 0.5, the percentage change in 1-t, using the midpoint method, is .2/.6, or 33 percent. With an elasticity of one half, his taxable income will fall by 17 percent. Thus, the economic impacts from these implicit tax hikes are sizable.

4. In my Times piece, I wrote, "None of this necessarily means that health reform is not worth doing. President Obama’s push for reform is premised on the belief that access to good health care should be a right of all Americans — a proposition better judged by political philosophers than economists. But we should not forget the cost of translating that noble aspiration into practical policy."

This passage may seem a bit passive-aggressive, as I appear to be criticizing the bill without really taking a stand. My aim, however, is to emphasize that economics alone cannot settle the debate.

Behind the healthcare debate is the classic tradeoff between equality and efficiency. Consider the following question, which is not about healthcare per se: Would you favor a substantial increase in marginal tax rates for millions of middle and upper income Americans to provide more resources for those toward the bottom of the economic ladder?

Your answer to this question cannot be determined by positive economics without adding in some normative judgments. But your answer should strongly influence your view of the health reform bill. The bill moves us closer to much of Western Europe by favoring equality and paying the price of reduced efficiency from much higher marginal tax rates.

That may be a policy choice Americans want to make. But before buying the merchandise being offered by Congress, I hope we all take a close look at the price tag.

Systemic Risk Bill: Amendment suggestion

I have another suggestion for the Systemic Bill. Someone should demand language, or file an amendment, that states:

‘Directors, Officers, senior management and consultants of any institution that draws on the industry funds created under this title or receives any relief or is subject to any other actions provided for under this Title shall, for a period of 5 years after such relief or support, be prohibited from becoming employed as Director, officer, senior manager or consultant at any regulated institution or an affiliated holding company or operating subsidiary’.

The Board should attest that they have no directors, employees, consultants in violation of this and regulators should issue a PCA letter if one is in violation.

Regulators should use PCA

1- it would cause greater focus and concentration on risk management and best practices.

2- it would cause whistle blower directors and silent objectors management to step down. This is a good thing and will drive investors to differentiate well managed firms from those who lose people and would force regulators to be aware of problem institutions.

3- Well run institutions to have a larger pool of potential quality officers and management to hire and those management would be rewarded with reputational advantage and renumenration.

Guest Post: Chairman of the Department of Economics at George Mason University Says Politicians Are NOT Prostitutes … They Are Pimps

By George Washington of Washington’s Blog.

Preface: My apologies if this is offensive.  As always, Yves Smith is not responsible for this content, does not necessarily agree, sponsor or endorse it.

Many people have called politicians prostitutes.

True, Obama has received more donations from Goldman Sachs and the rest of the financial industry than almost anyone else.

And Summers and the rest of Obama’s economic team have made many millions – even recently – from the financial industry.

And Congress has largely been bought and paid for, and two powerful congressmen have said that banks run Congress.

So yes, they have certainly sold their goods to the highest bidders.

Indeed, at least some people trust prostitutes more than elected officials.

But the prostitution analogy is inaccurate.

Specifically, as the chairman of the Department of Economics at George Mason University (Donald J. Boudreaux) points out:

Real whores, after all, personally supply the services their customers seek. Prostitutes do not steal; their customers pay them voluntarily. And their customers pay only with money belonging to these customers.

In contrast, members of Congress routinely truck and barter with other people’s property…

Members of Congress are less like whores than they are like pimps for persons unwillingly conscripted to perform unpleasant services.

Consider, for example, agricultural subsidies. Each year a handful of farmers and agribusinesses receive billions of taxpayer dollars. These are dollars that government forcibly takes from the pockets of taxpayers and then transfers to farmers.

The customers, in this case, are the farmers and agribusinesses. The suppliers of the services performed for these customers are taxpayers, for it’s the taxpayers who possess the ultimate asset — money — that farmers and agribusinesses lust after. And the intermediaries who oblige the suppliers to satisfy the base lusts of the customers are politicians. Just as pimps facilitate their customers’ access to prostitutes’ assets, politicians facilitate their customers’ access to taxpayers’ assets.

We taxpayers have less say in the matter than we like to think. Sure, we can vote. But if even just 50.00001 percent of voters cast their ballots for the candidate proposing higher taxes, the assets of not only our pro-tax citizens, but also those of the remaining 49.00009 percent of us anti-tax citizens are put at the disposal of our pimps’ customers. (And note that many of those who vote for higher taxes are not among those persons actually subject to higher taxation)…

Politicians force taxpayers to pony it up — just as the services rendered for a pimp’s customers are rendered not by that pimp personally, but by the ladies under his charge. The pimp pockets the bulk of each payment; he’s pleased with the transaction. His customer gets serviced well in return; he’s pleased with the transaction. The only loser is the prostitute forced to share her precious assets with strangers whom she doesn’t particularly care for and who care nothing for her.Also like the ladies under pimps’ power, taxpayers who resist being exploited risk serious consequences to their persons and pocketbooks. Uncle Sam doesn’t treat kindly taxpayers who try to avoid the obligations that he assigns to them. Government is a great deal more powerful, and often nastier, than is the typical taxpayer. Practically speaking, the taxpayer has little choice but to perform as government demands.

So to call politicians “whores” is to unduly insult women who either choose or who are forced into the profession of prostitution. These women aggress against no one; like all other respectable human beings, they do their best to get by as well as they can without violating other people’s rights.

The real villains in the prostitution arena are those pimps who coerce women into satisfying the lusts of strangers. Such pimps pocket most of the gains earned by the toil and risks involuntarily imposed upon the prostitutes they control. No one thinks this arrangement is fair or justified. No one gives pimps the title of “Honorable.” Decent people don’t care what pimps think or suppose that pimps have any special insights into what is good or bad for the women under their command. Decent people don’t pretend that pimps act chiefly for the benefit of their prostitutes. Decent people believe that pimps should be in prison.

Yet Americans continue to imagine that the typical representative or senator is an upstanding citizen, a human being worthy of being feted and listened to as if he or she possesses some unusually high moral or intellectual stature.

It’s closer to the truth to see politicians as pimps who force ordinary men and women to pony up freedoms and assets for the benefit of clients we call “special-interest groups.”

Note: There are a handful of honest politicians, fighting for the American people. But the exception proves the rule.

Guest Post: The Empire Strikes Back

By George Washington of Washington’s Blog.

Ron Paul tells Bloomberg that Congressman Watt has just more or less killed the bill to audit the fed:

Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.”..

Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee.

Congress is also suggesting that the Fed be given more powers, making it the chief risk regulator of the entire banking system.

Specifically, as summarized by Huffington Post, a new bill introduced by Democrats in Congress “gives the Federal Reserve the power to determine which firms are actually ‘too big to fail’ and pose systemic risk to the financial system.”

Given the Fed’s history (as discussed below), that is like appointing the head of the Medellin drug cartel as drug tzar.

Admittedly, the Congressional bill allows other agencies a seat at the risk regulator table. But those are likely token seats. If the drug tzar’s office was staffed by the head of the Medellin drug cartel – who had the majority vote – and some law enforcement officers who have a history of either (a) being on the take or (b) looking the other way, what do you think would the result would be?

High-Level Fed Officials Speak Out

High-level officials of the Fed itself have criticized the Fed’s actions. For example, the head of the Federal Reserve bank of San Francisco – during a talk on how runaway bubbles can lead to depressions – admitted:

Fed monetary policy may also have contributed to the U.S. credit boom and the associated house price bubble

Fed Vice Chairman Donald Kohn conceded that the government’s actions “will reduce [companies'] incentive to be careful in the future.” In other words, he’s admitting that the government’s actions will encourage financial companies to make even riskier gambles in the future.

Kansas City Fed President and veteran Fed official Thomas Hoenig said:

Too big has failed….

The sequence of [the government's] actions, unfortunately, has added to market uncertainty. Investors are understandably watching to see which institutions will receive public money and survive as wards of the state…

Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery….

Many of the [government's current policy revolves around the idea of] “too big to fail” …. History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger

The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke’s strategy of the endless printing-press and ever-increasing fed balance sheet:

Plosser urged the Fed to “proceed with caution” with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.***

Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed’s various asset purchase programs are not easily summarized in a single number.

But Plosser said that the growth of the Fed’s balance sheet was a key metric.
“It is not appropriate to ignore quantitative metrics in this new policy environment,” Plosser said.***
Plosser is bringing the spotlight right back to the Fed’s balance sheet.
“The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions,” Plosser said.

The former head of the Fed’s Open Market Operations says the bailout might make things worse. Specifically, the former head of the Fed’s open market operation – the key Fed agency which has been loaning hundreds of billions of dollars to Wall Street companies and banks – was quoted in Bloomberg as saying:

“Every time you tinker with this delicate system even small changes can create big ripples,” said Dino Kos, former head of the New York Fed’s open-market operations . . . “This is the impossible situation they are in. The risks are that the government’s $700 billion purchase of assets disturbs markets even more.”

And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:

Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.
In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.
The current situation at the Fed seems eerily similar, he said.

“What is discipline – where are the hard choices – when does Fed say our resources are exhausted?” Poole asked.

But the strongest criticism may be from the former Vice President of Dallas Federal Reserve, who said that the failure of the government to provide more information about the bailout could signal corruption. As ABC writes:

Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.

“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.

Of course, former Fed chairman Paul Volcker has also strongly criticized current Fed policies.

Global Agencies Speak Out

BIS – the central banks’ central bank – slammed the Fed and other central banks for blowing bubbles and then “using gimmicks and palliatives” which “will only make things worse”.

The head of the World Bank also says:

Central banks [including the Fed] failed to address risks building in the new economy. They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the ‘real economy’ of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.

Economists Speak Out

Stephen Roach (former chief economist for Morgan Stanley, and now director of Morgan Stanley Asia) is one of the most influential and respected American economists.

Roach told Charlie Rose this week that we have had terrible Federal Reserve policy for the past 12 years under Greenspan and Bernanke, that they concocted hair-brained theories (for example, that we should let the boom and bust cycle occur, but then “clean up the mess” once things fall apart), and that we really need to reform the Fed.

Specifically, here’s the must-read portion of the interview:

STEPHEN ROACH: And what’s missing in the debate that drives me nuts is going back to the very function of central banking that’s at the core of our financial system. Do we have the right model for the Fed to go forward? And, you know, I think we’ve minimized the role that the custodians, the stewards of our financial
system, the Federal Reserve, played in leading to this crisis and in making sure that we will never have this again. I think we’ve had horrible central banking in the United States for the past dozen of years. I mean, we elevate our central bankers, we probably .

CHARLIE ROSE: From Greenspan to Bernanke.



STEPHEN ROACH: We call them maestro, and, you know, we make them
sound larger than life. And, you know, and the fact is, they condoned
policies that took us from one bubble to another. They failed to live up
to their regulatory responsibility granted them by law. They concocted new
theories to explain why these things could go on forever, and they harbored
the belief, mistakenly in my view, that monetary policy is too big and
blunt an instrument, and so you just bring it in to clean up the mess
afterwards rather than prevent a mess ahead of time. Well, look at the
mess we’re in right now. We need a different approach here. We really do.

Leading economist Anna Schwartz, co-author of the leading book on the Great Depression with Milton Friedman, told the Wall Street journal that the Fed’s entire strategy in dealing with the financial crisis is wrong. Specifically, the Fed is treating it as a liquidity problem, when it is really an insolvency crisis.

Moreover, prominent Wall Street economist Henry Kaufman says that the Federal Reserve is primarily to blame for the financial crisis:

“I am convinced that the misbehavior of some would have been much rarer — and far less damaging to our economy — if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities …

Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.

“Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior,” Kaufman said. “It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective.”

Partly because the Fed did not strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall Act, more large financial conglomerates that were “too big to fail” have formed, Kaufman said, citing a factor that has made the global credit crisis especially acute.

“Financial conglomerates have become more and more opaque, especially about their massive off-balance-sheet activities,” he said. “The Fed failed to rein in the problem.”…

“Much of the recent extreme financial behavior is rooted in faulty monetary policies,” he said. “Poor policies encourage excessive risk taking.”

Economist Marc Faber says that central bankers are money printers who create bubbles, and that the system would be much better now if the Fed hadn’t intervened. Specifically, Faber says that – if the Fed hadn’t intervened – the system would be cleaned out, the system would be healthier because debt load and burden on taxpayers would be reduced.

Economist Jane D’Arista has shown that the Fed has failed miserably at its main task: providing a “counter-cyclical” influence (that is, taking the punch bowl away before the party gets too wild).

The Fed has also failed miserably in its role as regulator of banks and their affiliates. As well-known economist James Galbraith says:

The Federal Reserve has never been an effective regulator for the straightforward reason that it is dominated by economists and bankers and not by dedicated skeptics who make bank regulation a full-time profession.

The Fed has performed terribly in many other tasks as well.

And the Fed is unlawfully refusing to disclose to Congress or the American people who it’s giving money to and what it is really doing.


Given the above, isn’t it obvious that Congress is attempting to give the Fed more powers at a time when it should be audited, and then ended?

A Trader’s Guide (Introduction)

This is Michael Davey from Centrifugal Deforest. Regrettably (for you dear reader), the rumors circulating are indeed true. An apparently desperate Molehost had invited me aboard his Evil Spectre, in order to fill-or-kill a little empty space and comment on the event horizon. My purpose is simple - I’ll be holding rat hands while bobbing flotsam tides and jetsam streams, trading together in this ever amazing, shall we say special, marketplace.


In your face, frothing tough love perhaps (and you deserve it!), but my hand shakes something awful, while my palms are humid, flippant and mercurial. You’re on your own Einstein. Kudos to the human race.

If you’re (still!) reading this, you’re probably a trader (the rest of you nut-cases can leave now as this is where it gets boring). I know your kind. Heartless, wretched opportunists looking to profit from a gambling-house market economy - all for the sake personal gain, growth and a general swell being. Cynical is too nice a term for you.

You have my respect.

Assuming I’m not fired already, among other things here I’m going to run a quasi (moto) weekly series: A Trader’s Guide; which for the most part will entrail the psychological do’s and don’ts of (wait for it…) trading markets.

So while I can’t hold any hands, I can at least illustrate some of the myriad failure-traps a trader beds-down with, as well as the more opportunistic mindset aimed at maximizing gains (something you manage harmoniously to generally avoid).

Trading and investing mistakes will be made and losses are a certainty (for experienced and newer trader’s alike). None of us are above that. And while many of you tend to blame losses on manipulative market makers, Goldman shenanigans, POMO f-me pumps, etc. (I know because I read the pathetic transcripts), I’m a huge proponent of actually learning from trading mistakes and losses; adapting and getting stronger because of them. Spit sour grapes if you must, but complaining of outside forces instead of examining your own otherwise brilliant strategy is only limiting your net-performance - it’s as simple as that. If we want to actually (de)generate greater profit, we need to be honest, accountable and focused in the present. By limiting mistakes (eliminating repeat-mistakes and mitigating new ones which prop-up) you’ve conquered half the battle of trading success. In fact, by simply containing losses and pyramiding gains a trader does not even need to be right half the time to rake a decent year. You can be the worst coin-flip player on the board and come out ahead. Conspiracy theories of a rigged market should not interest you as much as your own little conspiracies, which are sabotaging gains. I do not expect to outlast Goldman’s super-computer, but as long as the market is volatile I can glean a good living (in a market with very little volatility the computer will kick my ass every time; I make money when I can, while I can, and I try to find some other pup seal to club when I have no edge. The victim-attitude serves no purpose but to lay down and declare I am owned (we’re only really yelling at ourselves, no?). There are plenty of other professionals who behave worse than these programs and they are still throwing a decent chunk of (other people’s) money around - let those guys be the chumps. My job is to eat that guy’s lunch, send him on his bike with head hanging low - for the sake of evolution if nothing else. This is a red-meat business. I don’t know what kind of dreamland world you might live in, but I don’t want to be part of the fool trough where a human mind (and computer program for that matter) can so eloquently self-destruct. Don’t sabotage the goal of something we (as a heartfelt community) seek to achieve - don’t sabotage the profit!

As I was drafting this, PCLN, as stock I went short as of the late minutes of trading Thursday, spiked higher in the after-market on news they will be added to the S&P 500.

So rigged.

Cliff Notes: Learn from the lumps and prosper because of them. Make them a positive. Appraise losses honestly, as well as gains (since you are constantly leaving the the meat of those on the table!). Seek to eliminate repeating mistakes and to maximize gains, from every point forward. You are always always working to get better (why not excel?).That is what this series will typically address.

You see now that I’m really an inspirational guide (Fire Walking - The Other 12 Steps!). The otherwise nasty, chewing-on about it all veneer is just a bit of tread-wear perhaps.

Re-tread wear, more like it.

Question: WTF is Centrifugal Deforest?

Yeah, that. No one ever asks, so I guess it’s working as a title. The name is coined from an unknown (to my memory) bogus-scientist’s theory that the Earth’s axis is actaully accelerating as the planet’s larger, old-growth trees are harvested - similar to how an ice skater speeds-up her spin upon crouching and bringing in the arms. Hopefully that makes as little sense to you as to me, but I really like the theory (if anyone can bring me the name of this guy I’d love to buy him  a beer and a trading account; just so I could view the trades). As far as my style of trading, the name plays well enough. I am ramping-up (accelerating exposure), as things are going well and I am shrinking in reverse fashion when going poorly. The idea is to have maximum exposure when winning and progressively lessen the blows otherwise). The ‘deforest’ part is also apt, I suppose. By participating and making a living in this industry I am contributing to the greater downfall of everyone and everything.

Copy that.

If I cannot answer your comments right now, it is because I’m boarding my flight in a few moments and I don’t know yet if there will be Internet on this plane [not!]. With this ES merger in hand, I’m off to spend some of Mole’s hard yearned money.

Homework: Yes, this course series will come with homework. For now the only assignment is merely to catch up with the previous two installments…

A Trader’s Guide to Chasing Ambulances
A Trader’s Guide to Exhaustion

[no internet on the flight - what kind of world do we live in?]

Good weekend!

Housing: „First-time buyers and investors“ are „market’s lifeblood“

From three DataQuick reports on Las Vegas, Miami and Phoenix ...

Las Vegas:
In September, a popular form of financing used by first-time home buyers – government-insured FHA loans – accounted for 53.8 percent of all home purchases, up from 52 percent in August. Absentee buyers bought 40.4 percent of all Las Vegas–area homes last month – the highest figure for any month this decade. Absentee buyers are often investors, but could include second-home buyers and others who, for various reasons, indicate at the time of sale that the property tax bill will be sent to a different address.
emphasis added
A popular form of financing used by first-time home buyers - government-insured FHA loans - accounted for 45.0 percent of all September purchases, while absentee buyers bought 29.7 percent of all homes last month, according to an analysis of public property records.
First-time buyers and investors remained the market’s lifeblood. Last month 46.7 percent of all Phoenix-area buyers used government-insured FHA loans, a popular choice among first-time buyers, according to an analysis of public property records. Absentee buyers made up 38.5 percent of all purchases ...
We are far from a healthy market ...
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