TANGERINE TECHNIQUE

One of my gurus’ taught me this technique, for some reason I haven’t been using it like I used to. I hope to start using it again.

 

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Welcome to Genius Sparks from Paul R. Scheele ************************************************

 

The concept of mind over matter is a fascinating one. It can explain such phenomena as how objects move telekinetically in a research lab to how humans achieve feats of greatness in the face of unimaginable pain.

 

And mind over matter is about to go mainstream.

 

Brain researchers and toy developers alike are using biosensors with computer interfaces to measure electrical impulses in the brain and decipher and interpret actual mental states such as attention and meditation.

 

In fact, two competing toys aimed for the market later this year will challenge the user, wearing a simple sensor, to focus their concentration to levitate and move a ping-pong ball with their thoughts.

 

The ability to measure and monitor the brain’s electrical activity isn’t new. I remember when I first used an electroencephalograph (EEG) years ago while PhotoReading, which uses both the left and right brain hemispheres—the whole mind—to mentally photograph the pages of a book.

 

The computer immediately registered a decrease in conscious, analytical brain wave patterns and a corresponding rise in deep learning brain wave patterns. It convincingly demonstrated to me the power of training to get into state for learning.

 

Human brain waves normally operate in a range of frequencies from 1 to 30 hertz, or cycles a second. Smaller frequency modes within this wider range are associated with a variety of brain functions or capabilities.

 

These modes are like “brain channels,” similar to television channels. At each of these channel settings, different personal resources are available to you. The slower brain frequencies are associated with remarkable powers, seemingly miraculous to those who use the faster brain frequencies of the conscious mind.

 

Just as you change channels on your TV, you can change your brain channels to tap more of your mind’s full potential.

 

Simply get into a state of relaxed alertness, the ideal state for reading, learning, or performing any mental activity. You can easily do so with the “tangerine technique” from our PhotoReading process. Here’s how:

 

• Hold an imaginary tangerine in your hand. Experience the weight, color, texture, and smell of the tangerine.

 

• Gently close your eyes and place the tangerine so it delicately balances on the top, back part of your head. Touch that area gently with your hand. Become aware of the feeling. Now, imagine that tangerine floating up and behind your head, 6 to 12 inches. • Imagine your field of vision opening up.

 

• Maintain the relaxed feeling of alertness as you open your eyes and begin your desired activity.

 

Use this simple technique anytime you want to quickly access your vast brain power—even if just to keep a ping-pong ball floating in the air!

 

http://www.LearningStrategies.com/PhotoReading/DeluxeCourse.asp

 

 

 

RISK DASHBOARD

Beta adjusted
Long GROSS	0.0%
Short GROSS	100.0%
Gross Exposure
Net Exposure	-100.0%
NAV
Leverage X	0.67
$ mkt exposure	-66.9%

 

BEAR SQUEEZE

This has been a bear squeeze of note, I am starting to think with this blow-off and the fact that DSI-sentiment on the Blue Chips has matched and exceeded the August 2007 highs that this may be the end of all of wave 2. If so this is incredibly bearish and I will need to keep vigilant to see how the selloff develops. For now I will still treat it as a pullback for further highs, but I am dropping my confidence in this count to around 55%.

LAND SECURITIES

I may need to cover my Land shorts on weakness as I am not sure if there isn’t another high to come in this bounce.

We are near a short term pullback

 

GOLDMANS PROFITS

I have a hunch, call me a cynic but a lot of the $2.7b trading profits Goldman recorded in its recent 2^nd quarter are likely to turn into losses during the 2^nd wave downturn in the markets.

I know nothing about which markets they trade in, but I have a hunch a lot of the profits were marked to market in a very dicey environment. If the same m-t-m principles apply in the leg down watch these boys go from hero to zero.

SENTIMENT DIFFERENT TO FUNDAMENTALS

Another example of how people behave as survivors.  People living in South Africa no doubt see a worrying big picture. They see rampant crime, a criminal justice system floundering, unemployment too high, an economy in recession, a brain drain, etc. Yet with the recent Confed cup a renewed enthusiasm towards the country is to foot. This weekend the country enjoyed the unity and goodwill from Mandela turning 91.

 

This is another example of how human emotion waxes and wanes despite the facts on the ground. People have a need and hope to survive this manifests with spikes in optimism.

HUSSMAN ON REACTING

July 20, 2009

Tending Seeds - Reacting, Responding, Planting, and Watering

John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy

In recent weeks, I've emphasized the very mixed nature of market conditions, which regardless of longer-term headwinds, remain very ambiguous regarding near term direction. For investors, the shifts in trend and the lack of clear direction create some difficulties, particularly for those who tend to react rather than respond to market fluctuations.

For our part, our focus is to ask the same basic questions every day – “What is the opportunity,” and “What is threatened?” We rarely have any sort of forecast for the market, and certainly don't have short-term forecasts here. Instead, we are responding to market fluctuations as they occur. For example, in response to last week's powerful rally, which brought the market again to overbought conditions, we took profits on the index call option position we established the prior week, and moved back to a fully-hedged investment stance. I certainly don't know whether that shift will be “right” in this instance, but it is the appropriate response from the standpoint of our investment discipline. Meanwhile, we continue to focus on individual stocks demonstrating favorable valuation and market action on our measures, with an eye toward buying higher ranked candidates on short-term weakness, and selling lower ranked holdings on short-term strength.

The distinction between reacting and responding is one that I've emphasized often over the years. To react is essentially to change one's plans abruptly based on what the market has just done – usually involving a certain amount of panic or worry that essentially forces one's hand. In contrast, to respond is to take the most recent market move as a piece of information, and to change the investment position accordingly, following a very specific discipline (ideally which allowed for the move in the first place).

For example, a reactive investor tends to reverse existing investment positions only when provoked by pain. Investment positions are sold when they have declined enough to trigger fear or panic. Investment positions are purchased in a rush to “catch” or “ride” them. My impression is that the single best mark of a reactive investor is the tendency to measure investment success by the amount gained or lost on any particular day. In contrast, the investor who responds puts much more emphasis on daily actions than on daily outcomes. That doesn't mean ignoring outcomes, but it means following a specific, well-studied discipline with the expectation that the results will emerge through repeated application. As usual, those results are best measured in terms of long-term return and risk over the complete market cycle.

As I wrote years ago in Force of Habit

"Over the years, I've written a lot about “daily action.” You decide on a set of actions that you believe will lead to good results if you follow them consistently. Then you follow them consistently. Unless a goal translates into daily, present action, focusing on that goal is simply a way of escaping reality. As Jean Paul Sartre wrote, “Je ne suis rien autre que mes actes” – I am nothing other than my actions.

"If an investor consistently takes positions based on forecasts, and changes those positions only when the market proves those forecasts wrong, that investor's life will predictably be dominated by hope, uncertainty, disappointment, reaction and frustration. If an investor constantly takes positions by responding to opportunities and conditions as they develop, with equanimity to what will happen next, making a habit of purchasing favorable value or early strength, and a similar habit of selling overvalue and early weakness, that investor's life will most probably be dominated by a sense of peace and control. Though it is not obvious which investor will have better results, my own opinion on that should be fairly clear.

"This doesn't mean that an investor who responds – rather than reacts – will know what will happen next. Rather, it means that this investor will be able to accept what happens next, knowing how to respond whatever the outcome. The point is to live in reality, and to take the next action from where one stands, without ignoring inconvenient aspects of reality in the hope of justifying one's position, and without wishing for the starting point to be somewhere else. The greatest source of human frustration is the desire for reality to be something other than it is.”

In short, as Robert Louis Stevenson wrote, “Don't judge each day by the harvest you reap, but by the seeds you plant.”

Tending Seeds

If you'll forgive the discourse (and at the risk of wandering a bit afield), over the years I've found thinking about the world from the standpoint of seeds to be enormously helpful. My friend Thich Nhat Hanh puts it this way:

“Consciousness is said to be a field; a plot of land in which every kind of seed has been planted – seeds of suffering, happiness, joy, sorrow, fear, anger, and hope. The quality of our life depends on which of these seeds we water. The practice of mindfulness is to recognize each seed as it sprouts, and to water the most wholesome seeds whenever possible.”

The basic idea is that, confronted with a whole host of seeds in our daily lives, the ones that we water will generally (though not always) be the ones that grow. So if we tend and water the negative seeds; worry, anger, disappointment, fear, and so on, the energy we put toward those seeds will tend to make them grow and become very big in our daily lives. If instead we tend and water the positive seeds; friendship, gratitude, discipline, peace, and happiness, then those are the seeds that will grow. That doesn't mean walking around like a Polyanna (which is unlikely for a crusty skeptic like me), but it does mean that there is some tendency, however imperfect, to reap what we sow, even just by what we choose to habitually think about. As the Buddha said, “with our thoughts, we create our world.”

To take this back to the practice of investment, it's clear that an investor who constantly waters a particular seed – fear of being wrong – will be forced into a particular set of daily actions, specifically, the investor will tend to hesitate when faced with opportunities that require deliberate, active choice, and at the same time, the investor will panic to adjust the investment position in reaction to every significant disappointment. While those adjustments can very well be rewarding when the market is running in a very clear direction, it is more generally a recipe for buying on strength and selling on weakness, and the cost of doing that on a repeated basis will tend to whittle down returns over a long period of time. Investors who tend the seeds of greed tend to reduce their returns more quickly and often spectacularly, but not without some amount of excitement and victory first. Tending and watering greed translates into the daily action of looking for improbable outliers and long-shots, and of accepting far more risk than can ultimately be tolerated.

But there are all sorts of other seeds to water. An investor who waters the seed of curiosity will not be content with investment platitudes and will stare at lots of data to figure out what actually works in the markets, and what the pitfalls are. An investor who waters the seed of discipline will emphasize consistency and persistence over one-off decisions and attempts to “make a killing” on a particular trade. Tending the seed of patience, on the other hand, can be either a help or a hindrance, depending on whether it is coupled with sober analysis or instead with blind hope. Patience, coupled with discipline and analytical curiosity, is not a bad combination of seeds from my perspective.

All of this may seem silly or simplistic on its face, but the reason for spending some time with this idea is that it can also be very powerful in re-orienting your actions and perspectives. It's worth the time to ask which seeds you habitually plant, tend and water, and what you expect them to grow to become as a result. This is true for investing, and isn't completely removed from relationships or parenting either.

Seeds not planted or tended by choice tend to be weeds, so at least for me, it's very helpful to consciously and periodically choose which seeds I want to water, and to think through what I expect to happen from that watering. Investors can spend a lot of time and energy reacting to the latest bits of news and trying to predict the next surprise, rather than choosing a consistent set of daily actions that they can carry out as things develop, regardless of how they develop.

 

HOW DO WE RECONCILE ALL THE OPTIMISM IN THE FACE OF DIRE ECONOMICS WOES

Currently the world financial markets are undergoing a remarkable spike in positive sentiment, with many of the most vocal bears becoming reformed bulls.

The question the bearish camp are probably asking, and I am one of them is, “what happened?” “did I miss something?” To add fuel to this burning stock market rocket the earning season has begun with a Watusi and Asian Economies are suddenly showing statistical signs of economic life.

 

So let’s try and understand whether the bears have it wrong and the worst is over, or are we just going through a phase in the bear cycle. I was having a cup of coffee a short while ago, and I thought the following analogy may explain some the more recent bullish behaviour. But before I begin I must add I have been working for months on a hypothesis that time perceptions create a kurtosis in the symmetry of the zero sum gain certain market theories support and lies at the heart of my analogy.

 

After looking for a home for more than 6 months Brad finally finds his dream home for his beautiful and large family. Brad and Angelina are keen to step things up a bit from their existing 8 bedroom home and their interest lies in a 10 bedroom mansion overlooking the Sydney Harbour bridge in prestigious Point Piper. Brad realises that he will need to step it up a bit to meet the monthly mortgage repayments as this is a whole new league with a hefty price tag of $30 million.

 

After gorgeous Angelina has called all her friends to tell them about her new home and the beautiful parties she will be having for the crew, Brad sits down to do some hard financial analysis. Actually Brad is not a numbers guy so he calls Abie his trusted accountant and says, “Abie come on over, we need to go over some figures.” Unfortunately for Abie it wasn’t the kind of figures he was hoping for as Brad had been told by the government to cool it with his extra-curricula activities.

 

The picture starts becoming clearer, Brad is good for $20m and he will need to borrow $10m which at the current interest rate means he will need to repay $50,000 per month for the new home. Brad is a resourceful kind a guy and although he isn’t working right now he is sure he can make it all happen. The day for settling the purchase of the new house looms, and Brad is feeling the heat. No it isn’t the Sydney moist summer heat, it is the heat from the bank over how he is going to pay them back every month when he is in semi-retirement. To add to his financial woes Brad still needs to come up with the $20m down payment, and he is having difficulty laying his hands on it. Not because he doesn’t have it but because a lot of it is tied up in investments that have stiff penalties should he wish to exit early.

 

Brad is starting to wonder why he got himself into all this stress as he was renting a most beautiful apartment on the North side of the bridge and he was sitting on a pile of cash in the bank. As quickly as he thinks about his reasoning he sees the beautiful Angelina and the 5 kids and he knows he has made the right choice. After a couple more weeks of hectic administration Brad and Angelina pick up the keys to their beautiful home having settled the purchase price to a former investment banker who has now had to sell his house to pay for his margin calls on the stocks he had been buying without telling his wife.

 

Brad has been cautious on advice from Abie and he has stashed a quarter of a million dollars in an account to cover the mortgage repayments for the next 5 months. It is all happy days in the Brad and Angelina household, the parties start rolling and before long all the socialites in the Brad and Angelina circle are having function after function at this most magnificent address, even Brad has forgotten about the stress that he had encountered in making this dream happen. It is simply happy days and Brad is very forcefully shutting out of his mind the fact that 4 months have elapsed and that with all the entertaining and jet-setting the cash resources in the household were fast depleting. A further concern was that many of Brad’s investments in other assets which he had hoped to live off for a while if not until he died were starting to turn sour.

 

In essence Brad now owned a house for $30m but could be worth closer to $25m as he was an eager buyer and pushed hard for the deal to happen, and the market had suddenly changed. His other investments were not worth what he thought they were and his cash flow was looking extremely anaemic. This story of Brad and Angelina continues in cycles of fear, resentment, hope, anger, joy, etc, for the life of their ownership until they have either paid the house off in full, or to an affordable level, or sold it and downgraded to something they can afford.

 

I believe this story is symbolic of the current financial crisis. Just like Brad secured a 5 month kitty, he was then able to dismiss the dire state of his finances and proceeded along normally, actually very happily. It wasn’t a lie, for Brad the reality was all was well over those 5 months, he wasn’t thinking beyond so his reality was positive. Again things took another bad turn for him he was able to dig deep and come up with a nice little deal that bought him another 2 years, and so the cycle continued. Yes the bears have painted a bleak picture and yes the economy and the world financial markets stare down an abyss of horrible consequences, but Brad and his counterpart society at large are resourceful and resilient and will continue to fight hard for their investment.

 

As bears we need to accept that in terms of our perception of reality which incorporates the entire picture which may take 10 years to fully unfold, there will be many periods of lucky deals that provide grease for the machine to continue ticking over and the system to appear sound. We need to roll with these waves of emotions and be ever vigilant to the fact that maybe just maybe this will be the one time that Brad either goes to the banks and says here are the keys or in facts sells it for half its purchase price.  

 

The forces driving our financial markets are groups of people and corporations each with their own perception of time. Some people involved with investments assess them hourly, daily, weekly, monthly, quarterly, yearly, etc; it is through the disequilibrium of these perceptions of time preference that cycles form into a reality that is diffuse from the underlying fundamentals, but is reflective of the overwhelming time preference of the dominating society at that particular point of overlap.

 

I look forward to making this all seem a lot clearer by setting it our more robustly in an algebraic statement.

 

Michael

 

 

FW: JUST SPOTTED THIS TODAY

 

By chance I came across this today, I found it quite interesting and leads on to my current thinking.

Mike

 

posted by americade on Tuesday 14 Jul 2009 21:58 BST

Peter J. de Marigny, DITMo Strategies / AMERICADE (14July09)

deMarigny: Classical Statistics, The NEW Paradigm

Any student of classical statistics knows better than to discard observations in a data series that are not outliers. For instance, to a clasical statistician "Sortino" is an abhorrent measure.

However, in physics there is a law large things (like Relativity) and small things (like Quantum Mechanics). In a macro form there is meaninglessness. In a micro form there are patterns that has recently given rise to the use of "FRACTALS." So as not to turn this into a technical mathematics and physics lesson, let's just focus on the idea of a "data series" that is the central focus of risk and portfolio measurement.

Professor Nassim Taleb is the author of "The Black Swan," a book about the likeliness of outliers though represented as improbable. There is no paradigm for the prediction of these events. In a prior short article on Albourne Village I proposed that using Parametrics to predict Black Swans is like using Carbon Dating on the geological record. Non-parametrics is better applied, but there is another consideration that relates to a "data series" to predict Black Swans. I noticed that this is connected to the psychological theory called "The Hundredth Monkey Phenomenon" made popular by author Kenneth Keyes. But what is the underlying paradigm that gives rise to the idea of how trends start from nowhere, and when a Black Swan event happens?

I propose that a data series is NOT a data series at all, but that applying ideas from Quantum Mechanics (the law of small things where order is observed) we recognize characteristics hidden from the macro view of the entire data series.

I believe that in each observation there is its own data series of which it is a part. All of our statistical tools try to make sense out of the interconnection of these observations of a data series (i.e. GARCH models, etc). What is the individual observation itself is the result of its own data series so that a data series (such as a return stream from payoffs) is not an input of an independent variable in some statistical model, but is composed of the interconnection of sub-data series? That is, an observation of a data series is not part of any data series but is a data series unto itself with its own parametric and non-parametric characteristics.

If we view observations as a representation of its own data series rather than an instance in a macro data series we would have a completely different view of parametrics, Modern Portfolio Theory, and Total Quality Management that uses classical statistics as its underpinning.

Peter J. de Marigny / DITMo Strategies / AMERICADE

 

FW: The future...

 

 

From: Michael Berman [mailto:micksonmatch@gmail.com]
Sent: Thursday, 16 July 2009 10:16 AM
To: 'Dani Peer'
Subject: RE: The future...

 

Hi Fonz,

 

We are loving the new house.

 

I have like the Elliott guys been expecting the market to climb on higher, my error in judgement was that I thought there would be a steeper pullback before we went higher. I am more convinced than ever that Fundamentals and Sentiment are 2 separate beasts or maybe more correctly the causality link is the reverse of what is commonly believed. That is the sentiment ultimately fashions the fundamentals.

 

Looking at sentiment and fundamentals as 2 separate entities for now, I think fundamentals are very slow moving metrics but they are reactive not causative, always reacting to changes in sentiment. Sentiment on the other hand contains this inner charge of its own energy and it tends to be shorter in its cycles but it contains within it deeper levels or layers. What we are experiencing is the cycle of sentiment whereby there is a need for hope and this has caused the sentiment to improve despite the economic fundamentals.

 

The causative link is only as strong as the underlying conviction of the sentiment. Hope tends to be a very weak emotion and usually ends in disappointment. I think were we may have been at fault isn’t being too pessimistic it is perhaps being too rigid in our beliefs and not accepting that the market is an expression of many peoples emotions and therefore requires more intuitive understanding.

 

I am currently working with a mathematician in the US a freelancer on the markets imbedded memory. I started with this line of thinking a number of years ago, and Charis, Ebrahim and myself collaborated on a paper whereby we were able to prove that data is “sticky” and contains traces of memory, i.e.   more recent data has a greater significance than older data, this is what drives those feedback loops which cause markets to behave irrationally to what we would expect. I maintain there is a way to predict these patters on a probabilistic basis, this incorporates the Elliott Wave Principle and a few quantitative overlays.

 

I edge closer to the grail but I believe there is an element of evolution to all these understandings which means that 1 model will not fit all circumstances. Anyway that is my thinking currently.

 

Mickson

 

From: Dani Peer [mailto:dpeer@bigpond.net.au]
Sent: Thursday, 16 July 2009 8:44 AM
To: Michael Berman
Subject: The future...

 

Hello Mickson...

 

I hope that you are enjoying your new home. Don't rush to finalise everything at once. That's your mother's style. Just take it as it comes. There's always lots to do.

 

I must say that I am surprised with the market's behaviour over the last week. From what I understood, the engine was much more damaged. There's still quite a few toxic debt instruments to step up, more unemployment in the pipeline and a very underpowered consumer - the backbone of Western GDP. However, the mood seems upbeat and there's much talk of emerging from the crisis and better days ahead.

 

Have you and I been too pessimistic? How do you account for such optimism at a time of such fundamental headwinds? Am keen to hear your thoughts.

 

Fonz

 

 

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SENTIMENT

This is more art than science, but I believe it is very worth taking note of these sentiment extremes, they imply a contrary to intuitive reversal.

Regards

Mike

MY WAVE COUNT

 

HUSSMAN EXPLAINS THE SO-CALLED MONEY ON THE SIDELINES

“As I used to teach my students, if Mickey sells his money market fund to buy stocks from Ricky, the money market fund has to sell some of its T-bills or commercial paper to Nicky, whose cash goes to Mickey, who uses the cash to buy stocks from Ricky. In the end, the cash that was held by Nicky is now held by Ricky, the money market securities that were held by Mickey are now held by Nicky, and the stock that was held by Ricky is now held by Mickey. There may have been some change in the relative prices between cash, money market securities and stocks, depending on which of the three was most eager, but there is precisely the same amount of “cash on the sidelines” after that set of transactions as there was before it.

“I'm similarly convinced that Wall Street has no idea what it's talking about when it uses the word “liquidity.” While using the phrase “global liquidity” lends a further element of worldly sophistication, Wall Street still hasn't the slightest idea what it's talking about. The phenomenon that's being called “liquidity” is nothing more than a combination of fiscal irresponsibility and risk blindness, and will ultimately prove itself to be the time-bomb that it is when investors begin to “re-price” that risk.

All of that is as true now as it was at the time in 2007, when the S&P 500 was above 1400. Investors hoping to ride a “wave of liquidity” may eventually discover that the wave leads to a plunge over the falls.

 

GLOBAL SNAPSHOT

 

US REITS

I think we are so close to a pull back

LOW VOLATILITY

This chart shows the low volatility in the US markets which fits in with why we have been buying puts.

The ULTIMATUM GAME

Over the last 4 weeks I have become increasingly intrigued by the irrational psychological responses typical of players in a game economists call the Ultimatum Game. The game was developed in 1982 by Guth, Werner, Schmittberger and Schwarze.

The game works like this: Player A, receives $100 and is asked to share it with Player B in a ratio at his/her discretion. The twist in the game is Player B the receiver of Player A's discretionary donation has the right to accept the donation or interestingly decline it so that neither player A or B is entitled to hold onto any of the $100 windfall.
 
I decided to put my laboratory jacket on and conduct the experiment with my 2 children aged 9 (girl) and 6 (boy) so that I could witness first hand their behaviour.  Having studied some of the vast literature I had a strong feeling how the experiment would turn out; unfortunately I wasn't surprised. 
 
The essence of this simple experiment is to check the axiomatic construct of Classical Economics - "rational man or Homo economicus". Once again you will see by extrapolation that to rely on what the mainstream economic experts predict for the economy using their models, is to rely on theory so riddled with contradiction that not questioning its economic reality is probably similar to the way the fund of funds behaved whilst investing with Bernard Madoff. The Austrian School deals with this by basing their thesis on the "acting man" principle which Mises describes as the study of Praxeology in his magnum opus, "Human Action". I will leave a comprehensive look at this subject for another time, save to say that there is no 1 size that fits all, rather human action is the process of subjective marginal utility.
 
So what happened with the kids, I can hear you asking? Gabriella was given $10 and I asked her to please share it with her brother and I explained to David that he had the choice to accept or reject the offer with the consequences described above. Gabriella chose to keep $9 and share $1 with her brother (incidentally, this split is the most typical offer in the research), David in keeping with the typical response to an offer in this ratio (75% of respondents voted in this manner) chose to decline the offer so that neither of them got anything. The explanation I got from my son without any shame or rhetoric is exactly the same as what the literature suggested. He said, "if she gets more than me then I would rather that we both get nothing". Interestingly the more equitable the split, in other words the closer to a 50:50 split, the more willing Player B is to accept the offer.
 
Now I ask you as rational human beings does it make logical sense to reject an offer that makes you better off. The logical answer is NO, but who said we are logical/rational. Game theorists have tried to devise complex models for predicting outcomes to similar problems with varying degrees of success. So why am I sharing the Ultimatum Game with you? My reasons are to expose you to the idea that the world does not behave according to a formulae of logic; rather selfishness and perceptions of equity play powerful roles in our decision making process. So in conclusion when economic pundits, Chairman of The Federal Reserve, Presidents of Countries tell you with conviction that the economy is developing "green shoots" and we are about to sprout into an economic recovery, at least realize that the models they are using tell them that David Berman will accept the offer of $1 from his sister Gabriella.

TOPPING

The 1^st leg of the bear market rally is over or almost over. The bounce has been short in time but sharp in the pace of the rise.

We are position for and expecting at least a 10% drop from current levels.

The UNCERTAINTY GAME

I recently renewed my fascination with the game of chess and now spend a lot of my spare time either playing or thinking about the theory that encompasses this remarkable game; I might add that I am a relatively weak player in case you were wondering.
 
Using chess terminology there is a "book-line" for the ideal moves and responses for each particular opening. So if I begin with the Reti Opening, the chess gurus use optimization algorithms to analyse a massive database of games with this opening. These book-lines become the beacons along which the experts typically try and replicate the game so as to gain the advantage from the best road already travelled.
 
This on the surface seems quite boring as the winner then should be the player with the greatest memory, as I used to naively assume. However, the game of chess with its 64 squares and 16 white and black pieces (each) is far more complex and intriguing. Let me just run through some of the numbers which are quite remarkable.
 
The average number of moves in competition level chess is 40. Therefore I wanted to establish how many different combinations or new games exist, so I posed this question to the chess theorists and was astounded at their answer. Their recommendation was that I should ask the question how many new games of 100 moves exist on this 64 square board, as if this would make the comprehension any more logical (I suppose there should be fewer 100 move games than 40). How many possible 100-move games are there then? For every move there are typically 10 variations. The answer is 10 x 10 x 10 .... x 10, one hundred times over, 10^100, 1 followed by 100 zeros. A "googol" of games. To give this some context, the number of atoms in the universe are around 10^78 -- 1 followed by 78 zeros.
 
So you may be asking where the heck am I going with this astronomical information? You see even though there may be an ideal way of playing a particular game of chess (according to the depth of the database analyzed) almost all games are different because human beings are not robots, we are thinking human beings governed by pre-cortex impulses and are prone to make mistakes (in my case far too many). So the game of chess never becomes boring as there are an infinite number of games to be played.

When it comes to the markets and economic theory there are the so called chess book-lines, but the number of possible responses to each step of the economic/market process is equally infinite. The reason is the same as in chess, we humans the actors in the economic world have free will to make our own choices, never mind whether they are logical or absurd. So a system that proceeds along the notion of the Neo-Classical, Keynesian or Monetarist Economic Theory, centered on the rational man, is likely to make for an elegant theory on paper but wanting when it comes to real world application.

The Austrian School of Economics ("Austrians") have built their theory of economics on a much firmer foundation, thus incorporating man and his actions as the central theme of their theory, known amongst Austrians as Praxeology. Praxeology is the study of those aspects of human action that can be grasped a priori; in other words, it is concerned with the conceptual analysis and logical implications of preference, choice, and so forth.

To fully explain the concept of Praxeology is beyond the scope of this letter, my point rather is to convey that even a school of economic thought that is far sounder in its logic and its worldly application is unable to accurately quantify the likely outcome of a given set of economic events. At best adherents to the Austrian Schools principles are likely to enjoy a more efficient market place than believers of a logically flawed system implemented by morally corrupt politicians.


The reason I make these statements is to try and convey the framework with which I develop our macro themes in the Freestyle Fund and of course the real world we live in. Whilst I remain interested in fluffy theories such as "double dipping" and "green shoots" and prepare our fund accordingly for the seemingly endless knee-jerk reactions in the market to new policy; as hedge fund managers we have to, our job is to meet the demands of generating positive returns in the medium to long term; however, I wish to emphasize that our macro constructs are based on theoretically sound economic principals that provide us with the necessary tools to build profitable strategies, not whimsical intuitions that are subject to random results.
 
Daniel Faraday the brilliant physicist in the science-fiction mini-series thriller, Lost, realizes the solution to his quest for changing history. As someone who has discovered the formulae for time travel, he theorizes that by going back in time and changing the variables not the constants he will indeed be able to change history. In other words we have no influence over the constants in the historic time travel equation, but the variables are us human beings. Humans are free to choose based on subjective preferences at any given point in time and therefore assuming we can go along the time continuum there is no likelihood of our history repeating itself, as the number of variations to the game called life are many more Googols than a game of chess or an investment in the stock market. Thus Faraday in Lost is suggesting what took Phil in Groundhog Day many identical days in a time-loop to figure out; we can and do change our history based on our actions influenced by subjective preferences at a point in time.
 
Understanding that there are no equations that can scientifically predict how thinking individuals (my theory differs slightly when dealing with group thinking) will react to a given circumstance is the first step in making a major leap forward in our understanding of the uncertain investment universe. The uncertainty that comes with this understanding is what separates science from fiction.
 
In conclusion, I leave you with a few thoughts on uncertainty. In his book On Being Certain, neurologist Robert A. Burton quotes F. Scott Fitzgerald – “The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.” Buddhist teacher Pema Chodron calls it “being comfortable with uncertainty” – being willing to take every aspect of reality as the starting point, without wasting energy wishing things were different, without denying reality as it is (even if your next step is to work toward changing things), and without needing to know what will happen in the future. “The truth you believe and cling to makes you unavailable to hear anything new. The best thing we can do for ourselves is to be open to an unknown future.” Burton offers the same advice. Tolerating the unpleasantness of uncertainty, he writes, “is the only practical alternative to cognitive dissonance, where one set of values overrides otherwise convincing contrary evidence.