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Quants: Wall Street's Alchemists
The following documentary from Dutch channel Vpro is a must watch for all who still believe there is something else to this market than pure low-volume, math-modelled momentum chasing courtesy of Wall Street's quant community (which is still happily front-running whale orders courtesy of such presumably banned inventions as Flash trading which the SEC bitched about then quickly swept under the rug). With appearances by Paul Wilmott, Mike Osinski, Emanuel Derman and Zero Hedge friend Matt Goldstein, the clip provides a much needed refresh course into the facts behind the biggest risk to the market since the 1987 crash. It is unfortunate that exposes like this, which warns about many of the core issues that Zero Hedge has been discussing for approximately a year, will rarely if ever appear on US television. And while the math and modelling that is involved in "predicting" the market is only as good as the losses suffered by the next quant driven systemic crash (1987, 2007), the greatest danger is the hubris exhibited by the very same math Ph.D. prognosticators who have an infallible belief in their own computerized concoctions... until proven catastrophically wrong: as is noted in the commentary "Making a lot of money is like taking a drug. You feel good, head to toe. When somebody hands you a million dollar check or a five million dollar check you want more. If I am making $5, I should be making $50, because I am a genius. There is no question in your mind that you are genius, and that you are so much better than everybody else." And this insight from Wilmott: "It is clear that a major rethink is desperately required if the world is to avoid a mathematician-led market meltdown. What you are supposed to do if you've got a warning, you are supposed to take your warning and write it in book form. You are supposed to write 300 pages about the dangers of etc, etc. I am a mathematician, and what mathematicians do is take something that is 300 pages and they condense it into one equation. And that to them is beauty."
Full video after the jump (skip after the Dutch intro - most of the rest of the video is in English).
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Or, as I like to call them, Qunts.
LOL
"Got to hold 10,300...got to hold 10,300..."
"Got to hold 1,100...got to hold 1,100..."
"Got to hold 5,300...got to hold 5,300..."
DavidC
Malevolent Money-grubbing Malchemists
3M
Lifestyle of a Quant:
Julius Gaudio
Age: thirty something
MD @ D.E. Shaw
Special Friend: Chandra Jesse
Party Time circa 2004
http://bit.ly/9hDrHL
Greenwich, CT House
http://bit.ly/c2Qpqw
Naples, FL House
(under construction lot purchased for $18m, house will be finished in another year @ $20m)
http://bit.ly/a4QpvZ
Golf with Clinton for a cool 3/4 mil (charity)
http://bit.ly/cZbPPA
Career path
http://bit.ly/9ezBto
The Summers connection
http://bit.ly/bKSrT8
{1987,2007,X} X=2027
Beautiful. I am a genius. I still have plenty of time.
So let them eat money..
is all Ive got to say
The original alchemists sought the philosophers stone or fountain of youth or elixir of life. Transform base metal into very rare noble (god's) element--gold.
Translated from 17th century document in Latin and German.
Presented without comment.
http://www.tphta.ws/ANO_WAST.HTM
http://en.wikipedia.org/wiki/Fountain_of_Youth
When folks finally see that they can’t just get someone else to pay for all this, there will likely be a huge tax rebellion
which will cause more short term problems, but may in the long term (hopefully) have the effect of getting the government to manage our money better. In the meantime, let’s hope we don’t have too many large national disasters, military conflicts, pandemics or the like to deal with. This country is in a lot of trouble and we need to start thinking like Americans instead of Republicans or Democrats if we’re going to get through this mess……
Meanwhile experts say the market will crash sometime this year..
Fasten your seatbelts...
So much resentment, and for what?
One of the most exciting scenes in those old westerns was, undoubtedly, the buffalo stampedes. You have the buffaloes, some unfortunates in their path, and some guy (usually the hero) overlooking from a rocky ledge.
All this before the computer was born. Before mobile phones, before automobiles. And so it will be, after Mars mines and Moon colonies.
Tyler, of course things like this is rarely (if ever) on USA major/national TV because you need to see who owns the major networks and what is THEIR self interests. Of course you already know that.
**********************
NATIONAL STRIKE
APRIL 15 to APRIL 18TH
TELL EVEYONE YOU KNOW
www.taxfree15
**********************
On the other hand, if someone were willing to donate a cool $5 million or so to PBS, I'm sure they would be happy to air it on their network in the 2am time slot.
Just so long as there's no gory murdering or boobies involved.
Jeff Cooper
Feb 18, 2010
Minyanville
On August 24th, 1987, there was a major planetary convergence that coincided with a major top in the stock market. I am not an astrologer but I recall the convergence well because it was well publicized in such mainstream publications as Time.
When the worst crash since 1929 occurred less than two months later, many saw it as a sign. There was a sense amongst many that the crash was the sign of a second great depression to follow.
According to Jose Arguelles interpretation of Mayan cosmology, the August 1987 date defined the end of 22 cycles of 52 years each or 1,144 years total and the Harmonic Convergence of 1987 also began the final 26 year countdown to the end of the Mayan Long Count in 2012 where a new 5,125 year cycle would begin.
Just as many world changes began a few years prior to the Convergence, a crisis and many world changes began a few years prior to the presumed cycle turning point in 2012.
What has all this got to do with the stock market today? Not much perhaps except as offered previously, in the fall of 1987 there was a correction that mirrored the shape of the correction 5 to 6 months before and I recall well at the time that the overwhelming majority of market participants at the time believed that another bullish correction that mimicked the last correction was playing out. In fact, in early October of 1987 prior to the crash, the largest point rally in history occurred (to that point in time). There was no follow through. Many traders, awaiting for that sign of strength to reappear continued to greet weakness as an opportunity---until the Mother Of All Weakness swept over them on October 19th, 1987. The crash began 49 calendar days from the August high and ran through the 55th day from high, a period Gann referred to as the Death Zone. This is the same pattern that played out in 1929 with the crash beginning 49 days (7 squared) from high and running through the 55th day.
Tuesday, the largest rally in three months occurred. The prior largest correction since the March low occurred in June/July with the S&P tracing out an apx 9% decline. The recent correction from the January 11th peak was also an apx 9% decline, once again mirroring the correction from 5 to 6 months prior, just as in 1987.
Today is the 49th calendar day from the January 11th top. Moreover, we are also in the 49th WEEK from the March 6th, 2009 low.
It is worth considering that waterfall declines don’t occur from highs, they occur from a lower high. They occur after a reflex rally, after a backtest of resistance.
Walter Murphy
February 17, 2010
WMinsights.com
Stocks: Even if a rally through 1104-1105 were to occur, we do not believe that would change the big picture outlook as described in our January “Year Ahead” piece. We continue to believe that a challenge of the January high would result in more numerous and more important negative divergences than those that already exist. It would be a condition not unlike the divergences that appeared in October 2007 as the market penetrated the July 2007 high.
John Needham
February 12, 2010
thedanielcode.com
(Posted 02/09/10): On the DC "monthly" chart (24 trading days), the month ending 02/08 closed at 1056.74 basis the index and this is outside the regression channel which had a lower boundary of 1067. That gives us a Sell setup on the monthly chart. A monthly close(on 03/12) below 1044 will confirm.
(Posted 02/12/10): On the 12 Day Regression Channel, the trend is up. a conditional sell signal has been made. A close on 02/24 below 1044 will confirm.
AM here: The 24 trading day chart above shows the Danielcode monthly trend indicator that per Mr. Needham is'a proprietary but unsophisticated mix of largely traditional market studies. In this chart we can see a whipsaw in the trend in 1994; thereafter it stayed on a buy signal (blue) until November 2000; switched to a Sell signal at that time and remained on the bear side until September 2003. From there it signalled a resumption of the bull market until February 2008, when it again alerted us to the impending bear market about 90 days after the market top in October. The notable feature of this chart (24 trading days is a Danielcode “month) is the stability in its signals. The indicator showed one dominant trend for long periods of time, with no whipsawing since December 1994.On the 12 day chart (also shown above-AM)we now get some whipsawing in the signals for the 2002-2007 Bull market, but precious few considering the time span, and the regression channels are barely changed.'
Charts at http://anonymousmonetarist.blogspot.com/2010/02/anonymous-monetarist-rou...
Arch Crawford
January 11, 2010
astromoney.com
It would be considered a ‘done deal’ or a high probability that World Markets will Crash again during 2010. The point of greatest exactitude of the general ‘meanness’ will show itself in late July and early August. During that period Mars will conjoin Saturn, both opposing Jupiter conjoining Uranus (you can joke all you want, but THIS is no laughing matter). Pluto will form a square angle to all four, making a T-Square pattern of extreme animosity.
The dichotomy arises from the Bradley Model showing the Crash period as down from March and culminating with this configuration. On the other hand, our Mars/Uranus Crash Cycle portion of their synodic period, which has contained Every Crash for the last 100 years, bodes the Crash period AFTER the completion of the massive alignment.
We will do everything but guarantee you that stocks will crash worldwide within three months of August first (that is between May 1 and November 1). It is expected that technical market analysis of data generated by current market action will assist in pinpointing most danger/opportunity as critical moments approach.
I laughed so hard the Tea was projected from my nose all over my laptop! Thanks for the laugh!
The history books regale all of us with folks that dismissed that which ran counter to the consensus or in opposition to the conventional view.
On a personal note I do not hold my opinions in high esteem but rather look to disprove them per the empirical method.
Whatever remains after that process at least from a probabalistic perspective needs to be weighted in one's consideration.
Humbly, life has taught this fella that knowledge is gleaned from failure.
Believe what my eyes see and appreciate, to paraphrase Todd Harrison, that knowledge is gleaned by the friction of opinions.
Best to you!
I have been watching the tape full time for nearly a decade. I am a fan of market history & reviewing old & forgotten charts. I think I know my stuff.
I do not understand this market at all.
Id like to take a math whiz all over those math turds.
POWERFUL video. Touching, responsible, technical, inquisative, creative, and important.
H.S. teachers and Professors, please watch, understand and teach THIS.
To hear people distill a market down to a tidy formula is a stunning display of hubris.
Thank you. Don't forget to tip your waitress.
They are not "Alchemists". That's far too distinguished a job-description for them. They are charlatans - - at best.
~~KingBuzz
Interesting to hear the guy at the end talk about designing programs based on goggle search terms…. When is the Playboy IPO coming to market?
A quant I know well was recently offered a position with a multibillion hedge fund; job is to do language processing on the BRICs "news" (well, I guess the consensus is B is easy but unnecessary and there is no meaningful news in the R...) streams & generate signals. They are going to give him a $750K guarantee on top of a $300K base. Nice work if you are a multilingual scientist...
decent bits of information, but too long winded and too many oyster shucking montages. would be excellent if it were 15min.
"..major rethink is desperately required if the world is to avoid a mathematician-led market meltdown."
As a society we need to re-examine the philosophy of Plato.
In a discussion he relates that occurred between Socrates and his friend Calliphes (sp?), Call states that the key to the good life is the ability to get whatever you want, whenever you want it, in whatever amount you desire.
Both Socrates and thus Plato go on to define exactly why this view is faulty; and yet, we seem doomed to discount the timeless wisdom of humanities two greatest thinkers and are powerless to repeat the faults of the past.
Suffice it to say that any happyness (intentional misspell) a thief experiences is gained from the relief of the burden they carry and not true happiness.
Exceptional video. I left that work about 10 years ago, and I can't even recognize it today. We had a bit of an advantage in the "early years" as fundamentals were still the primary drivers of price. You could write models to consumer large volumes of fundamental data, establish probabilities, and trade the probabilities. Those days are gone.
Many more people need to see this documentary and contemplate the potential of sustainability in an economy driven by mathematical finance.
Errors in compound nonlinear statistical models are not additive. They are exponentially multiplicative. And when minimizing time as a function of profit, the potential for unintended, immediate consequence becomes very high.
The temptation to keep writing is high, but I'll just stop here.
The market does repeat... the Black Swan (or whatever palatable term suits) Event was foreseeable, the constant strain of one-upmanship within the market… the 1st group having milked cow properly, to the 2nd group who then introduced stimulants to produce more milk from the same cow, to the third group who cloned the cow and added stimulants without factoring in a genetic defect… to the 4th generation of Quant’s and the Idiot Executives who stood upon their shoulders who insured the life span of the cows… to the Federal Government that then invested in cloning more cows (knowing of the fatal genetic flaw) with stimulants… this behavior marches on yet still today.
Same shit, different day.
Maybe an interesting read for those who want more?
http://www.quantnet.com/hollow-men-of-financial-engineering
What ought to be done? For what they’re worth, the following are my suggestions:
1. The first step is obviously the admission that something needs to be done in the first place. Given the evidence thus far, this is unlikely to happen any time soon. Once it takes place though, we are fairly close to a workable resolution. Financial engineering is not intended to guarantee that no deal ever loses money, no more than medical school guarantees than no patient ever dies on the operating table. But it does guarantee that consistent standards have been employed in the hope of achieving uniform and reproducible results in the sense of a statistical measure. Within a well-organized and properly functioning financial system, by definition as small portion of the deal universe needs to under-perform, or else the capital structure has not been optimized. The fact that no deal ever loses principal is not a sign of superior financial knowledge and intellectual prowess. On the contrary, it is explicit evidence for the fact that risk has been eliminated instead of managed, and always at the expense of efficiency. Contrary to what most Wall Street money managers believe, a single-name CDS contract with some AAA DPC is not a risk-management tool; it is a risk-elimination tool. As usual, those who believe risk can be eliminated usually end up bearing all of it.
2. The second step would be the wholesale revamping of FE curricula around deal-making and its mandatory skill set, instead of remaining the current morbid obsession with the Black-Scholes PDE. Given that most FE academics keep as far away from deal-making as they possibly can, this is also unlikely to occur in my lifetime. Perhaps this fear of the gauntlet happens because most of them would fare even worse than those they are now accusing of misunderstanding finance, although it is true that, to misunderstand something, you first have to understand it.
3. Finally, since the vast majority of FE educators are out of touch with the adrenaline-laden atmosphere along the yellow-brick road, they would have to, somehow, become cognizant of actual financial practice instead of remaining ensconced in a secluded environment telling the rest of us how life really is on Wall Street. This means that practice and theory need to slowly and monotonically merge into one another, eventually to become identical. It also means that, instead of being the butt of every financial joke that they are today, financial engineers would acquire the same epistemological status that all other engineers have always enjoyed, i.e. they would be able to make a meaningful contribution to their employers right off the bat instead of having to be retrained from scratch because they are effectively children, unable to figure out how deals come together without major handholding. In most cases, unsupervised financial engineers are highly toxic to an institution’s well-being, not to mention their own.
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