Victor's Nemesis: Nissim Taleb

Nissim (he spells it Nassim) is a Lebanese Christian who has discovered that really consecuential events are imprevisible and even unimaginable, yet they erase years and generations of gradual development and growth. He calls them black swans. In finance he discovered that much of the statistical methods are based on the Gauss distribution, while reality is never so standard and there are "fat tails" i.e. oulayers that are more frequent than they should be if reality was ordained according to the standard distribution model. Physical events like falling of coins and of the roulette ball follow the standard distribution (till the contrary is demonstrated) but human events, specifically market events, do not (mass hysteria, panics). He has a fund operating according his principles, which loses money in normal days and months, but makes a big bunch when unanticipated events occur, which necessarily they do. Taleb buys cheap options on very unprobable events, and he is ready to lose small amounts a thousand times to make a big hit once a number of years. His approach is the nemesis of Victor Niederhoffer's, who 'scientifically" calculates chances and buys naked shorts, trying to make small gains with high probability. He writes (on the Twin Towers event investigation):

Much of the research into humans' risk-avoidance machinery shows that it is antiquated and unfit for the modern world; it is made to counter repeatable attacks and learn from specifics. If someone narrowly escapes being eaten by a tiger in a certain cave, then he learns to avoid that cave. Yet vicious black swans by definition do not repeat themselves. We cannot learn from them easily.
The first flaw is the error of excessive and naïve specificity. By focusing on the details of the past event, we may be diverting attention from the question of how to prevent future tragedies, which are still abstract in our mind. To defend ourselves against black swans, general knowledge is a crucial first step.
Yet infinite vigilance is not possible. Negligence in any specific case needs to be compared with the normal rate of negligence for all possible events at the time of the tragedy ‹ including those events that did not take place but could have. Before 9/11, the risk of terrorism was not as obvious as it seems today to a reasonable person in government (which is part of the reason 9/11 occurred). Therefore the government might have used its resources to protect against other risks ‹ with invisible but perhaps effective results.
The third flaw is related. Our system of rewards is not adapted to black swans. We can set up rewards for activity that reduces the risk of certain measurable events, like cancer rates. But it is more difficult to reward the prevention (or even reduction) of a chain of bad events (war, for instance). Job-performance assessments in these matters are not just tricky, they may be biased in favor of measurable events. Sometimes, as any good manager knows, avoiding a certain outcome is an achievement.
The greatest flaw in the commission's mandate, regrettably, mirrors one of the greatest flaws in modern society: it does not understand risk. The focus of the investigation should not be on how to avoid any specific black swan, for we don't know where the next one is coming from. The focus should be on what general lessons can be learned from them. And the most important lesson may be that we should reward people, not ridicule them, for thinking the impossible. After a black swan like 9/11, we must look ahead, not in the rear-view mirror.

Nissim has valuable insights but he, like all money managers from Soros to Victor whom I am learning, talks lots of bullshit. People gives them their money to manage because they have confidence in their competence, knowledge, academic titles - and the more they talk in priestly Latin (or Aramean) the more confidence they generate. By the way, I have been thinking about probability and risk for fifty years, and dont understand it.

A Stilleto in Victor's Back

I have never met Mr Victor Niederhoffer and I have only beneficial feelings toward the man, who is feeling unwell these days. He never harmed anybody, yet his colleagues are always badmouthing him. From these stilletto-in-the-back comments, one can learn how big the man is. Be well, Victor!

With his firm losing money (this was May 2006), Mr. Niederhoffer, 62 years old, scrambled to reassure his investors that this time his losses were manageable. He succeeded in steadying the firm, and says his ability to withstand the lashing -- not to mention the fund's annual returns of about 50% over the past three years -- are evidence he has learned from previous mistakes. Victor Niederhoffer trades at a 10-bedroom Connecticut chalet -- with a "no shoes" policy for all. "I had a bad May. I made some mistakes, that's regrettable," Mr. Niederhoffer says. "But one sparrow does not make a spring, and nor does one bad month." The losses continued in June, however, and Mr. Niederhoffer's largest hedge fund, Matador Fund Ltd., with about $250 million, was down 12% on the year through the end of June. That's worse than the gain of 4% for the Dow Jones Industrial Average through June and the 2% drop in the Standard & Poor's 500. Mr. Niederhoffer's challenges are a sign of the troubles of many big traders lately. Although the main market averages' losses haven't been huge, many successful investors built up gains in various global markets this year but have lost more than 10% in just the past two months. It's a reminder that Mr. Niederhoffer remains one of the most talented and volatile traders -- unable to kick fully the habit of a high-risk, high-reward investment style, even at a point in his career when others would turn more conservative. "I have complete trepidation about going under again. I have seven kids and I couldn't afford that," he says. "But I don't know how to make money without a lot of risk."

The Brooklyn-born Mr. Niederhoffer, a former U.S. squash champion and the son of a New York City police officer, was one of the most acclaimed traders in the mid-1990s, at one point managing about $100 million for hedge-fund manager George Soros. In his memoir, "The Education of a Speculator," published in 1996, Mr. Niederhoffer recalled his many successes, but also cited his predilection for risk, including poor bets on the dollar, yen and other investments that threatened to put him under. "I am a speculator, and my daily bread depends on reversing big moves," he wrote. "When I hear the 'thunderous roar and hiss of escaping steam' from the market...I know it's time to jump in." By 1997, he was confident enough to move into foreign markets, such as Thailand. His timing was terrible. That was the year of the Asian economic crisis, which clobbered markets across the region. Making matters worse, he used borrowed money to invest, a strategy that can amplify gains -- but also deepen losses if the markets turn against you. Ultimately, his lenders forced him to close down. He had to sell treasured family jewels, such as a collection of antique silver, to raise cash. After several years working in obscurity, Mr. Niederhoffer in 2002 returned to investing for others, again embracing futures and options bets. Despite the hits he has taken, Mr. Niederhoffer returned to a strategy that does best when the market rises, a reflection of his view that stock markets generally climb over time and an optimistic perspective that is belied by his shy, cautious mien. "I guess you could call me a chronic bull," he says, dressed, as usual, in pastel-only colors, this time orange chinos and a yellow button-down shirt.

As the market rose over the past four years, Mr. Niederhoffer topped almost all hedge-fund rivals. In 2002, his fund gained 3%, according to materials released to investors. The next year it was up 41%, in 2004 the fund gained 50% and last year it rose 56%. By way of comparison, the Dow Jones Industrial Average lost 17% in 2002, rose 25% in 2003 and 3% in 2004, and dropped less than 1% last year. Mr. Niederhoffer says he "made restitution" to investors who had lost money in his first fund. He formed a trading team including a former professional poker player, a hotshot stock trader just out of college, and several professors with mathematics backgrounds. His fund trades out of his 10-bedroom, Connecticut chalet situated on 13 acres of land, where, among his other quirks, he maintains a no-shoes policy in his trading room, reflecting an Asian influence. Mr. Niederhoffer says he doesn't use an air conditioner at his firm because it gives him a stiff neck. He discourages his traders from speaking aloud in the office -- they usually converse through email during the trading day, even when sitting nearby -- to try to develop a serious atmosphere. And he maintains a strict formality, addressing employees by their title and last name and referring to his right-hand man, Steve Wisdom, as "Mr. Wisdom." "I've adopted the traditions of the British Navy," he says, "It's important to keep emotions in check....At any moment disaster can strike."

Mr. Niederhoffer has six older daughters from two marriages, and a recent newborn son from a surrogate mother. He plans to raise his new son with his girlfriend, a former business reporter. New investors have flocked in during the past two years and Mr. Niederhoffer cut down on the amount of borrowed money used to amplify his trading returns, though the hedge fund still borrows as much as three to six dollars for every dollar it manages, higher than most rivals. "There's apparently a competent method to his madness that has resulted in a splendid record over the history of his investing career, with the exception of the one disastrous blip a number of years ago," says Laurence Leeds, chairman of Buckingham Capital Management, a New York money-management firm who personally has invested for the past year in Mr. Niederhoffer's fund. "His methodology of investing is quite sophisticated and not one I particularly understand, however I believe strongly in Victor's intelligence and competence." Others remained wary of placing money with a manager who once went under, worried it could happen again. Mr. Niederhoffer says he makes it plain how volatile his trading style is. "When my friends ask if they should invest with me I say, 'No, it's too risky,' " he says.

Mr. Niederhoffer was riding high earlier this year, up almost 30% by the end of May. Those gains encouraged him to become more aggressive, he acknowledges. Although Mr. Niederhoffer no longer dabbles in emerging markets, he still sells short-term "puts," or options that pay off if the market tumbles in a short period of time. When stocks started tumbling in May, these positions turned into losers. Mr. Niederhoffer trimmed his positions and reduced risk -- moves that some traders incorrectly suspected were signs he again was throwing in the towel -- to keep his losses manageable. As the end of a recent trading day, he was staring at his computer screen and urging quiet from other traders, hoping to make money in the final furious minutes. Mr. Niederhoffer accuses rivals of spreading rumors that he is down on his luck to make money on the other side of his trades and says he receives weekly emails from mutual-fund managers and others who are enjoying his travails and rubbing it in, he says (How true! the SE). But he says his investors are sticking with him.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - comments:

Bitstream: the strategy he employs he pretty much straightforward..he just sells otm puts and has zero hedge in place...my granma' can do that. i got plenty of respect for hedge fund managers but not for this self-centered freak'o, hes doin' nothin' out of the ordinary and has no risk management clue WHATSOEVER.

surf: that is absolutely not accurate.

Bitstream: no? since u are worshippin' him night and day why dont u illuminate us in the matter....if he had some kinda risk management in place he wouldnt have lost 50% of his money in a month, innit....only way to lose that much is with a single, concentrated, un-hedged pos...innit obvious?

Pekelo: I am sorry Surf, but on this one you are wrong and Bitstream is right. What I would like to know is: what are all those geniuses and mathwizzards doing in his trading room?

psytrade: probably picking positions that are uncorrelated to each other in an attempt to reduce volatility so they can use more leverage. until the black swan event comes along and wipes them all out...

stock777: you know, I like Nied and he writes well, and has some interesting stuff on his site. But I'd hate to conclude that his best performance comes from leverage and playing russian roulette with the fat 'tail' man. So he borrows 3-6X , which makes a 50% gain not so amazing after all. It's only good if you are protected from blowing up in some rational way. Otherwise you are simply providing disaster insurance for the market at the expense of your own hide.

"Those that know ain't saying, and those saying don't know." - E. A. Neumann

Longhorns: Countdown until MarketSurfer is here to defend Niederhoffer ....5....4....3....2.....

Money is something you need in case you don't die tomorrow.

steve46: ... This is a kind of verbal "divergence" that the rest of us call "bullshit". I am sure you hear this all the time. Hey I don't want to cause you undue tension. For all we know you could be on some medication or under the care of a mental health specialist for any number of personality disorders. I am not a mental health practitioner but I would encourage you to stay with a course of treatment that works for you, and try to integrate those personalities into one if possible. I won't be teasing you anymore regarding this. It wouldn't be fair. Good luck with that. Unless he can stage a terrific recovery, I think he will see a lot of redemptions and account closures this year, leading ultimately to his departure from the business. Somebody should poke him with a fork, cause honey, he's done

If you want a friend on Wall Street, get a dog.

The Fuel Cell Industry

The pic shows a proton membrane made by Dupont especifically for fuel cells. It works by allowing protons (hydrogen nuclei) to move from one compartment of the fuel cell to the other to reunite with electrons and form hydrogen gas or react with oxygen from the air and form water. The electron flow is the electrical current and it can be used to produce movement, light or whatever. The fuel cell industry consists of hundreds of startups, all directed to substitute conventional batteries and generators. It is an industry based on secret designs and patents.

My design of wastewater microbial fuel cell intends to catch a completely different market. In conventional biological wastewater treatment we have always aerobical and anaerobical processes, generally in different chambers, set up sequentially. These two processes have the potential of operating as a fuel cell. However, the energy produced is very little and the whole thing is not viable commercially. However, the concept of wastewater treatment and production is electricity is the summum of cleantech which is highly subsidized and pushed by environmental "green" legislation all over the world. It is in such "green" non-strictly-commercial (but profitable) market that my concept is highly viable, just like other green technologies are being adapted in spite of being much more expensive than conventional technologies. I will give an example of the type of market I am thinking of: catching and storing rain water for irrigation is terribly unpractical, unhealthy and expensive, however, the technology is widely being adopted and even imposed by legislation (like in the USA and Germany). The same is the use of grey water for irrigation: my friend Lior A. sold dozens of garden systems and the demand was tremendous (unfortunetely his system didnt work because the filters got clogged up by lint, and I had no free time to help him). I am going for Lior's market of friends of the environment.

Shorting Oil

Commercials are shorting oil which seems to be the smart thing to do. Also Deutsche Bank agrees that events like Nigeria's chaotic elections, or Iran's kidnapping of British sailors, which in the past would have caused a dramatic rise in oil's price, nowadays seem to leave the oil gnomes rather indifferent. The environment is more relaxed. I bought 100 put options on oil, expiring on November 12, 2007 at 70$ per barrel. For each dollar below 70 $ per barrel I make 100 $. This is the first time I am in this market, lets hope my perennial optimism is justified.

La Murga se Formo un Dia que Llovia

We lived in the barrio of Liniers in Buenos Aires, donde termina el asfalto - where the asphalt ends... It was a poor Spanish - Italian - Turco (Arab) - del interior (mixed blood native from the provinces) neighborhood, built by the Ferrocarril del Oeste and near the Iglesia San Cayetano, where a multitude of people came to ask the saint for the miracle of a job. It was an era with no television nor computer games, when we boys spent all our time on the streets. Sex was our main preoccupation and we had experts among us who initiated us into the mysteries. No one had disk-players and we bought cheap booklets with the music of popular songs. We were hinchas de Velez Sarsfield, the local soccer club, and collected figuritas with the names of the players. In Carnaval the barrio met in the Mercado de Liniers and our noisy murga went singing and dancing around. The murga (an informal street singing and dancing gang) was led by the director dressed in a black frac with sombrero de copa , with a baton and a pito, and we started our presentation with "Esta murga se formo un dia que llovia, y por eso le pusimos .......”. Everybody had some "instrument" to make noise, like boxes and frying pans. Our repertoire consisted in bawdy songs, here is one I remember:

Los Hermanos Pinzones
eran unos mari… neros,
que se fueron con Colón,
que era otro mari… nero
y se fueron a Calcuta
en busca de una… ruta,
conquistaron Camboya
con la punta de la… espada,
los indios motilones
les cortaron ... la retirada,
Una india muy maja
a Colón le hizo una… pipa
al piloto Pedro Angulo
le quisieron dar por… muerto,
y a su hermano Bobadilla
le llenaron de la… ureles,
y a la Reina de Castilla
le gustaban las… natillas.

and we loved to scandalize the girls - chicas de su casa - who in turn loved us. PC had not been invented yet and with absolute lack of sensitivity (and malice) we provoked las negras culonas African ladies, the turcos alibajalajaula and the rusos dame joivos. We accepted donations, more precisely the only way to be left alone was to drop a few coins into our paper hats, and we felt free and happy. Old and forgotten Buenos Aires.

A Worrying Study

Among a fringe community of paranoids, aluminum helmets serve as the protective measure of choice against invasive radio signals. An MIT team of students investigated the efficacy of three aluminum helmet designs on a sample group of four individuals. Excerpt:

It has long been suspected that the government has been using satellites to read and control the minds of certain citizens. The use of aluminum helmets has been a common guerrilla tactic against the government's invasive tactics. Surprisingly, these helmets can in fact help the government spy on citizens by amplifying certain key frequency ranges reserved for government use. In addition, none of the three helmets we analyzed provided significant attenuation to most frequency bands. Using a $250,000 network analyser, we find that although on average all helmets attenuate invasive radio frequencies in either directions (either emanating from an outside source, or emanating from the cranium of the subject), certain frequencies are in fact greatly amplified. These amplified frequencies coincide with radio bands reserved for government use according to the Federal Communication Commission (FCC). Statistical evidence suggests the use of helmets may in fact enhance the government's invasive abilities. We speculate that the government may in fact have started the helmet craze for this reason.

Materials for the Wastewater Biomass Fuel Cell

Graphite paper, highly electroconductive and porous. Good for the cathode. A Chinese company manufactures it. Also available in shops of drawing materials.
Penn State's Wastewater Fuel Cell is based on a Carbon Fiber Brush media that houses the electron-generating bacteria. The graphite brush appears to be available by mail order.

The Shortage of Financial Assets

MIT's Caballero proposes that asset supply is not keeping up with the global demand for store of value and collateral by households, corporations, governments, insurance companies, and financial intermediaries more broadly. Global imbalances, the recurrent emergence of speculative bubbles (which recently have transited from emerging markets, to the dot-coms, to real estate, to gold...), the historically low real interest rates and even the widespread low inflation environment and deflationary episodes in parts of the world, all fall into place once one adopts this asset shortage perspective.

These shortages have been a perennial problem in emerging markets, where many of their economic perils and idiosyncrasies stem from this feature. But we are now seeing a shortage on a global scale. It probably began with the meltdown of a substantial share of Japanese assets in the early 1990s, it was exacerbated by European stagnation and the collective emerging market crises of the late 1990s, and it consolidated in the new millennium by the fast income growth of China and commodity countries, most of which have substantial asset demand needs but are not asset producers.

In addition to these factors, the recent rapid pace of financial development has facilitated restructuring, innovation and economic growth, but because of their margin requirements they may well have been a net collateral consuming activity, at least in the short run. The so-called “global imbalances,” the recurrent emergence of speculative bubbles (which recently have transited from emerging markets, to the dot-coms, to real estate, to gold...), the historically low real interest rates and associated “interest-rate conundrum,” and even the widespread low inflation environment and deflationary episodes in parts of the world, all fall into place once one adopts this asset shortage perspective. If we could ignore capital market frictions of all sorts, emerging market economies would borrow massive amounts from the rest of the world, both to build the stock of capital required to catch up with developed economies and to smooth consumption intertemporally. However, this description does not fit these economies’ reality. Not only is their international borrowing limited, but they also experience chronic capital outflows from residents, ranging from households to central banks, seeking to store value in safer locations. In short, emerging market economies are not able to produce the financial assets demanded by local agents to store value. The reasons for asset supply shortages in these economies come from a variety of deficiencies such as weak bankruptcy procedures, chronic macroeconomic volatility, and sheer expropriation risk reduce the value and safety of local assets.
A higher capacity to produce output makes the underlying capital more valuable, but the possibility to sell the rights over that output in advance, and hence to create an asset from it, depends on a series of institutional factors that vary across the world. Anglo-Saxon economies have managed to combine good growth conditions with an unmatched ability to generate sound and liquid financial assets appealing to global investors and savers. On the other end, emerging market and oil-producing economies have seen large increases in their disposable income, but remain largely unable to generate an adequate supply of good quality assets.
What he is saying is that only the USA and England have the ability to generate attractive financial assets, turning oil and commodity rich actors into a forced market for those assets. With Asia growing richer, the liquidity searching to be invested securely overloads the system, so assets such as American real estate and stocks are scarce and more expensive.
An additional factor is that many firms consider themselves unappreciated by the markets and are buying back their own shares, reducing the supply of good סחורה (soyre - merchandise, in Hebrew, stolen goods in Hungarian jargon). Also the acquisitions of private equity firms take out of the market large chunks of merchandise. I imagine that the growing current of Israeli startups selling IPOs on Nasdaq are one of the most important sources of supply of new, exciting stocks, and that creates a countercurrent of US dollars to Israel, making the shekel more expensive. Gut.
I wonder why Swiss or German assets are not being bought, since they are solid and secure. The answer may be their primitive financial markets and lack of salesmanship. I am studying for the last few months the Berlin Bourse and it has very solid and good companies, but the market lacks imagination, cosmopolitanism, aggressivity. Some je-ne-se-que-pas is missing without its Jews. Could Israeli financial assets be sold in the world? I think that the current inflow of foreign currency shows that it is being done. One problem is that Israelis prefer to launch their companies in London and the Nasdaq, which have more liquidity chasing stocks. Which financial intermediaries are selling Israeli assets to foreigners? They are only the big banks - Poalim, Leumi, Discount. But they are forbidden to sell mutual funds, so it is Excellence, Prisma, Harel. I think they are destined to be large international firms. Their stock may be good investment in the long term. On the other hand, American investment houses have set up shop in Tel Aviv and are vacuuming in most of the business. Quoting Yale's Prof. Goetzmann's felicitous expression: But who knows.

Sibelius on Kantele

The Secret Wife lured and trapped me in a kantele (a Karelian folk instrument) concert in the new campus of the Open University in Kever Benjamin City. The visiting artists were Suvi Lehtonen-Grasbeck and her husband Folke Gräsbeck. The music was too complex for my education, but I loved Folke's comments on the political and personal background of the music. To me, Finns and Russians are undistinguishable, but he painted the Russian Empire as big, bad, unjust, prepotent, conquering. The Russians in the audience loved it and chuckled politely. Finns are nice people and enjoyed the concert.

I ordered the Contractor to do it all again

The Contractor did not follow my instructions and had to order to destroy and rebuild all. In the pic Menachem, an American last-year student of engineering (in my course in Ariel) working on the site as supervisor, and a construction worker.

Guru Ginzborg said buy Koor and I did

Ami Ginzborg from HaAretz, my wife's forest-killing far-left fish-wrap, wrote today that Koor was a good buy. I suspect there was only one sucker who ran and bought the stock, because I paid 2% over yesterday's close and then it went down.

A year ago, IDB (TASE: IDBH) aka Nochi Dankner bought the controlling interest in the holding company Koor Industries (NYSE: KOR). It serves as conduit through which IDB owns controlling interests in Makhteshim Agan Industries (TASE: MAIN) and ECI Telecom (Nasdaq: ECIL). The main problem with a holding company is that some of the value (typically 10 - 15%) will not pass to shareholders. Koor owns 39% of Makhteshim Agan and 30% of ECI. Its stake in Makhteshim Agan, an agrochemicals company, is worth $1.3 billion. Its holdings in ECI, which makes equipment for phone companies, is worth $300 million. Koor itself is traded at a company value of $1.05 billion. Even if we deduct Koor's net liabilities and add privately-owned assets, mainly holdings in hi-tech startups, we see that it's trading at a discount of 25% to 35% to its net asset value. In the last year Dankner has been cleaning out Koors secondary holdings. Since most of its privately held holdings have been sold, its ability to expose hidden value is all but gone. Koor is still a cheap way to invest in ECI or Makhteshim Agan, in the hope that IDB will issue a tender offer.

Remembering German Rosenmacher z"l

It would be an exaggeration to say that I was a friend of German Rosenmacher, but I admired and copied his style of writing. He was a fat Jewish boy of my milieu in Buenos Aires, with Coca-Cola bottle bottomlike glasses, ten years older than me and one who actually did publish a small book Cabecita Negra and put on scene a play in the Jewish community's theatre. He was from the Once neighborhood, from one of the hundred conventillos (old houses where very poor immigrant families - Jewish, Italian, Spanish - lived each family per rented room. Many had no electricity even in the sixties and had one kitchen per courtyard). He was a Peronist when Peronism was a proletarian movement suspected by the Jews, and a (somewhat vacillant) proponent of assimilation into the body of Argentine society, a position that not even the Jewish Communists maintained. He never actually crossed the invisible borders of Buenos Aires's Jewish neighborhoods and environments. He was invited once to a lecture in the Ken, our Zionist youth movement club, and he seemed confused and unsure. He died in 1971 at age 36 with his son, when the cooking gas oven was left open in his Mar del Plata apartment and they were asphixiated. It was suggested that it was a suicide, due his inability to conciliate his Jewish roots and the hopelessness of assimilation, but most probably it was just an accident. I read and re-read his short stories: that is how I wanted to write. We Jewish boys were all little secret writers and poets. I wonder what became of Oswaldo Dragun, another published writing boy of my generation.

PS: Surfing the internet, I am amazed that a Literary Prize had been established in the name of German Rosenmacher and learned articles have been written by erudite Spanish and other academic researchers on his work. It is almost like touching eternity: He was just a confused fat Jewboy of the neighborhood who wrote like we all did, it is so strange that time has made of him an important writer.

Advance in Wastewater Fuel Cell

Penn State researchers report:

"The carbon fiber brushes are electrically conducting, very inexpensive to produce and supply large surface area for the bacterial biofilm attachment," says Bruce E. Logan, the Kappe Professor of Environmental Engineering. "These anodes can be made by any existing brush manufacturer in any size or shape desired."
Microbial fuel cells work through the action of bacteria, which can pass electrons to an anode of a fuel cell. The electrons flow from the anode through a wire to the cathode, producing an electric current. In the process, the bacteria consume organic matter in the wastewater and clean the water. The Penn State approach uses the bacteria that naturally occur in wastewater, requiring no special bacterial strains or unusual environmental demands.
Previously, Logan and his team showed that small, rectangular fuel cells that used a carbon fiber paper as anode and a carbon fiber paper with platinum catalyst as cathode could produce electricity and clean water from wastewater. However, commercial scale-up for carbon fiber paper cells was not practical. Using brush anodes, which have 300 to 1,500 times more surface area than the previously used carbon paper anode, the fuel cells created more than twice the power produced by the fuel cells two years ago. A fuel cell using a small brush about 1 inch in diameter and 1 inch long produced the equivalent of 2.4 watts for every 260gallons of water using the carbon paper cathode.
"The anode is no longer a limiting factor in power production for these cells," says Logan. Other carbon anodes were problematic because the pores or spaces became clogged with the biofilm and lost efficiency, but because the brush contains very fine fibers with plenty of circulation room around them, dead bacteria do not clog the brush.
With the anode no longer limiting scale up or bacterial growth, the researchers turned to the cathode. " "We needed a new type of cathode that could produce much more surface area," says Logan. "Many systems use platinum catalysts, but platinum is too expensive.While the brush anode can be submerged in the wastewater, the cathode must have one side exposed to the oxygen in the air to work. The researchers looked at membrane tubes currently used in wastewater treatment applications for an answer. Commercially available in a variety of sizes ranging up to 6 to 8 foot tall, these membrane tubes are not electrically conductive.
"We painted the tubes with conducting graphite paint and added a cobalt-based catalyst," says Logan. The painted tubes did work to produce power, but not as much as the carbon paper doped with platinum. "We showed a proof of concept with these tubes, but now we have to improve the efficiency and reduce costs," says Logan. The researchers tested two cathode configurations, one with the catalyst on the outside of the tubes and one with the catalyst on the inside of the tube. In the best test case, the researchers used a carbon fiber brush anode and two tubular cathodes of about .6 inches in diameter doped with a cobalt catalyst on the inside, the fuel cell produced 18 watts per 260 gallons of water and achieved a charge efficiency of more than 70 percent.
The newly configured anodes and cathodes also allow for a variety of configurations of the fuel cell. "With these new anodes and cathodes the design of a wastewater treatment reactor could be as simple as a large tank with the brushes and tubular cathodes inserted into the same tank," says Logan. An additional benefit to the microbial fuel cell is that while it generates electricity, it cleans up the wastewater, something that usually requires the consumption of energy.

This is real advance. The idea of the large scale reactor is problematic. because it would be grounded. It is not clear if the batch processing could be adapted to continuous operation.

Searching for Value

Inventive investment managers find fields that are not congested by existing investors and in markets that may suffer from mispricing. Uncovering that mispricing may require specialised knowledge that few investors possess, creating profitable barriers to entry. What are these investments? Old stuff. Zionist parafernalia like old harrrows and tractors. Old cars. Old motocycles. Old anything collectable. Rare minerals. Fishing rights. Hunting rights. Passports. Visas. Chinese antiquities and famous paintings and editions. All kind of old trash. Eastern European judaica from goy peasants of former shtettl. Russian Tzarist bonds. Old shares that may give rights. All kind of old rights and privileges that in special conditions may be sold, like a knighthood, or the right to a road. Medals or the right to give medals and trophies. Think.

Cute Weapons

Cute and sweet Swedish anti-aircraft missile (the RBS-70) roughly equivalent to Russian weapons like the RPG-27 and AT-14 Kornet in the anti-tank role, and by the SA-18 in the anti-aircraft role.

Unsubtle

I lost my way on the internet, found myself in Naziland and watched the 1939 film Ewige Jude. Its tone is didactic - it tells a structured story culminating in a clear message: Jews will be exterminated. It includes extensive portions of an American Yiddish self-parody and concludes with Hitler's prophesy. Unlike represented, his diction is clear and he is not shouting. Jews in Poland seem to pass the day in idleness on the streets, or petty commerce. They filmed mental hospital immates as prototypes of the Jewish race, while the German ubermensch were shown as gross and ugly, towering peasants. Not as the beautiful humanoids of Bladerunner. I can imagine the feelings of German women watching the shchita scenes. The film gave me a headache.

Next day: One of the stunning things in the film is that the representation of the Jews as foreign, tax cheating, disrespectful of sacred symbols - is done spontaneously by the Jews themselves. Jewish jokes reveal a selfhating people. One thing Zionism has done is to fight this Galuth mentality and to give backbone to our people. Today is the Remembrance Day of War Casualties, I dont really like these state ceremonials, but we need them more than any other peo0ple to learn respect for ourselves. The second thought is that prewar Jews were given clear and honest appraisal of how the Nazis perceived them and what was awaiting them should they fall into their hands. Obviously, no sophisticated, cosmopolitan Jew could believe that the Nazis percieved a comedy piece, a self-mocking satire, as mirroring their reality, but Germans famously are humorless. To disregard the message of this film was a monumental mistake. That explains our current overreaction to Nazi manifestations.

TASE shall not fall

TASE is growing steadily, with an increasing supply of stocks, options and bonds. Since I started to be involved in it (a year and half), the number of warrants have doubled. The money streaming in is increasing mightily, including foreign money that is depressing the exchange rate. The value growth of TASE may continue during the coming years, as the pension reform forced the investment of 15 billion shekel a year (4 billion dollars) in the Israeli capital markets. Were it not for the pension reform, this money would be buried in designated State of Israel bonds rather than invested in the capital market. The conclusion is that the financial industry will be principal beneficiary of this process.

According to Yahoo, Deutsche Bank and Goldman Sachs tripled their value in the last 5 - 8 years (10% p.a. compound interest). Which is the best choice of financial stock on TASE? Tase Financial Index has the fifteem most capitalized stocks and they are:

Union Bank - Igud
Ahwa
Excellence
Bituach Yashir
Beinleumi 5
Discont
Harel
Clal Bituach
Leumi
Migdal Bituach
Mizrahi Tepahot
Menora
Poalim
FIBI
Phoenix

I had bad experience with Igud. I had it for a few months hoping it will be sold, but it is still cheap. I hold now Clal Bituah and two small investment houses: TAU and Anter Holdings. I shall start analysing and comparing them this afternoon.

Eternal prosperity

Repeated warnings about a world recession have come to nothing. The cycle of a recession every 5 to 7 years have been broken. China is advancing at 10 - 12% p.a. and pulling the world behind it. According to a study based on IQ and the Wealth of the Nations, the 85% of the world's GNP relative deficit is in China. If China's potential is equivalent to current South Korea's GNP, then its growth may continue uninterrupted for many years. The condition is an America willing to police the world and maintain peace and order. Maybe there will be no more recessions in our lifetime. The pic is to improve the visual quality of the blog.

Investing in the Israeli Defense Industry

Rabintex.The stock rose 7.5% last week and 25% in 2007. The rumor says they received large orders from the USA Army for different combat related articles, and these VIP personal shields are being sold like hot cakes. The technical analysts of the Sponser site (DALTOT) are very optimists and say it can rise 10% more in a few days. The option is expensive and points to the speculators's lofty hopes. Interesting.

Index Funds - China vs TASE

At the start of the year I sold the non-performing parts of my portfolio and invested in new things, among them in Kesem TASE 30 Index Fund (which follows thirty stocks not included in the TASE 25 index) and Kesem Sin (an index fund following Chinese stocks). Up to know the chinese index is showing much volatility but somewhat better results (14% vs 12%). Chinese are crazy for the stock exchange and they are entering into it by the hundreds of millions.

Water Startup - Not Business, But Charity

Motley Fool has confirmed what I am maintaining for years: The fact that billions of human beings lack drinking water is not a bona-fide business opportunity but at most a charity opportunity. The Fool is promoting a children's play pump - what is called appropriate technology - not as a business (they know the suffering billions cannot pay for it) but as a charity. QED.

The Motley Fool Global Gains team believes strongly in the power of the human spirit, and we believe it's a poverty for us all that one person should want for water. That's why we're launching a campaign to raise money for a dynamic organization called PlayPumps International. PlayPumps is based in South Africa, and like so many great things, it got its start from the mind of an entrepreneur. Trevor Field, an advertising executive, saw an opportunity when he came across a machine an engineer had developed that used a child's merry-go-round to pump water. Mr. Field saw a way to turn such a contraption into a more complex watering system. He also realized that the mechanism could solve one of the real problems that has bedeviled governments and other organizations for years: developing a water pump that circumvented the various unreliable sources of power to operate it.
But Mr. Field also noted that in the poorest areas in South Africa, children had precious few alternatives to play. So why not combine the two into a water-pumping system driven by playing children? He deployed the first two pumps in South Africa's KwaZulu-Natal Province in 1994, and they're still working today. The cost to provide water to a person using the PlayPumps system breaks down to about $0.60 per year.
Global Gains is an international investing service blessed with members from around the world. Many of us have seen firsthand the brutal, wrenching impact that abject poverty has on children and families. Now, we've found a way to help give back some of what we get from the global community to those most in need of our help.
We wanted to find a charity with an international scope -- one small enough for our support to make a visible difference, yet established and broad-minded enough that we could be certain of its reputation, effectiveness, and appeal. We also wanted to be able to track our progress. But most of all, we wanted to find a group that truly had, in every way, the interests of its "clients" in mind. In sum, we sought out a Foolish charity, and after considering scores of extremely worthy groups (and we are considering expanding/renewing our efforts over time), PlayPumps leapt off the page to us. Children playing! Fresh, clean water where there was none!
Even better, PlayPumps is extremely efficient in utilizing almost every penny of its raised funds to deploy pumps. These aren't empire builders, yet their efforts have been noticed by such corporate partners as Sasol, Coca-Cola (NYSE: KO), BHP Billiton (NYSE: BHP), JPMorgan (NYSE: JPM), and Unilever (NYSE: UL), who join in supporting PlayPumps.

I read that the Gombe Primate Reserve in Africa is suffering from drought and the populations of wild chimps and mountain gorillas suffer from thirst. The water supply problem could be solved by installing a few PlayPumps, easily operable by those smart hominids.

Microbial fuel cell that treats sewage and generates electricity

The idea of a microbial fuel cell that runs of sewage has been around for a long time and many prototypes have been built, including the school prototype shown above. The concept definitely works and produces electricity while purifies sewage. From the treatment angle, it reduces the cost of treating sevage in some 50% (because it generates instead of consuming electricity), from the electricity angle, sewage contains oxidizable organic compounds (600 mg/liter) that produce electricity directly, without passing through the methane phase and the need to burn methane. I do not foresee this technology competing on a commercial basis with other forms of generation, but under the current hysteria small prototypes could be sold including for schools.

Bacteria in a fuel cell work as they do in any sewage treatment system: They oxidize the organic matter, and they get energy from it and make new cells, but instead of sending electrons to oxygen, which is expensive in terms of energy to dissolve in water, they send those electrons to an electrode. In one model, bacteria are placed in the anode chamber of a fuel cell separated from oxygen. As the bacteria began to digest, they transfer electrons to an enzyme, which then transfers those electrons to an electrode. Because they do not have oxygen, they must transfer the electrons that they obtain from consumption (oxidation) of their food somewhere else other than oxygen; therefore, they transfer them to the electrode. In the microbial fuel cell, these electrons are transferred to the anode, while the counter-electrode (the cathode) is exposed to oxygen. At the cathode the electrons, oxygen, and protons combine to form only water.


Most microbial fuel cells use a two-chamber design (see above). A single-chamber microbial fuel cell (as shown here) consists of an acrylic cylinder with eight graphite anodes (or negative electrodes) inside, to which the bacteria attach, and a hollow central cathode (or positive electrode). Electrons flow along a circuit wired from the anode to the cathode. A better design is an upflow microbial fuel cell fed continually that works with chambers atop each other rather than beside each other. The cell is based on a carbon-based foam with a large pore size on which biofilm grows, making it possible to connect two electrodes in the anode and cathode chambers with a conductive wire.
Prof. Bruce Logan has the latest model (see pic). He writes that "While current generation using bacteria has been known to be possible for over a decade, only recently has it been shown that chemical mediators (toxic chemicals added to a reactor) are not needed. This finding that chemicals do not need to be added to wastewater could drive development of a completely new wastewater treatment technology based on MFCs. What is needed is a method to increase power flow by optimizing a fuel cell for use with bacteria (as opposed to hydrogen and inorganic catalysts). In a MFC, the potential created between electron carriers in the bacterial respiratory chain and oxygen is harvested by allowing bacteria to transfer electrons from respiratory enzymes to an electrode (anode) while still in an anaerobic environment. A second electrode (cathode) is kept in an aerobic environment, so that a potential is created. The flow of electrons from respiratory enzymes located on the outer membrane of the bacteria across this potential creates current which can be captured. The purpose of this SGER proposal is to demonstrate the feasibility of this MFC approach for wastewater treatment, and to show for bacteria we must optimize current flow at the cathode. In this project we will demonstrate power generation from wastewater is optimal for current flow in an MFC when substrate is first fermented, and that power generation can be much higher than previously believed. We will construct three types of MFCs in the laboratory: a batch system with a salt bridge that mimics a seawater type of fuel cell; an otherwise identical system that uses a proton exchange membrane (PEM); a fully optimized cathode that uses a direct air system."

The only patent I found on the subject is the vertical (non-batch) cell: Title:Upflow microbial fuel cell (UMFC)
Document Type and Number:United States Patent 20060147763
Kind Code: A1 Link to this page:http://www.freepatentsonline.com/20060147763.html
Abstract:An upflow microbial fuel cell in one embodiment is comprised of a generally cylindrical cathode chamber containing a cathode sitting atop a generally cylindrical anode chamber containing an anode, with a proton exchange membrane separating the two chambers, so that as influent is passed upwardly through the anode chamber electricity is created in a continuous process not requiring mixing such as with a mechanical mixer or the like. Electrodes are connected to each of the anode and the cathode for harvesting the electricity so created. Effluent may be recirculated through the anode chamber by a second inlet and outlet therein. A multiphase fuel cell includes a plurality of electrode couples arranged in a single chamber with an influent inlet near its bottom and an effluent outlet near its top, with the electrode couples connected in series to generate electricity at higher voltages. In another embodiment, the cathode chamber--preferably U-shaped--is positioned inside the anode chamber.
My comment: It is terrible vague. The direction of the flow is not material to the process, it could be downflow or sideflow. I am no patent lawyer but this is undefensible.

My idea is a "generally more or less double celled fuel cell with graphite anode and platinum cathode embodied as per the Secret Engineer's Secret Design" (the design is so obvious that I will not publish it here). The cell produces electricity that can be measured only by a sensible measuring instrument, and there is a need of several cells to light a lamp, so I cannot propose its use as a bonafide sewage treatment system nor as a economically competitive or significant energy source. It could find a market as (1) scientific parafernalia to be sold to school labs interested in environmental science (2) to "green" buildings as a green object of interest or conversation object, (3) idem to wastewater treatment plants (4) green sewage related sensors (to power instruments in places where there is no electricity, but I am not sure if it is reliable and powerful enough).

Student Strike in the Ariel College

It is the second week of the student strike and I am uploading my lessons and exercises to the Michlalah's website. The air photo shows the Michlalah as it was a year ago. To the right the upper campus where Civil Engineering is, down right the neighborhood where lives my daughter (she is a student of Economics), and in front is the court formed by the Balint, Hubert and Raab buidings. On the road west is the girls dormitory that carries my Szereny neni's name. Almost all the building carry the names of my Mother's family, all originally from Vac, Hungary. The white lines are the hundreds of caravans where the students live, it costs them 100 $/month. They say it is very cold in winter and hot in summer, although Ariel has a very pleasant and fresh climate. The university is a great success, and is growing very fast. The student body's quality is improving, with many kippah srugah youngsters from the Yesha settlements, many with authomatic weapons, and flocks of giggling Arab girls from the Triangle and Galilee. I have some charedi students too.




I wanted to illustrate this note with a photo of the foundation of the City of Ariel, an event where I participated. It was around the year 1978. The Likud organized autobuses from Tel Aviv and thousands came. I specially remember the colourful Yemeni groups dancing with 5 gallon tin box "drums". I may have somewhere pictures I took at the event, but I could not find any on the internet. This the nearest one, with Ariel Sharon and Menachem Begin (who arrived half an hour late and gave a bombastic speech I didnt catch), Dr Burg the head of the Mizrahi Party, and Benny Katzover from its young wing. It seems like history but it was only yesterday for me.

Buenos Aires on TASE

"Fair Winds" on Tel Aviv Stock Exchange have forwarded my sailing ship more than 10% this month. Fantastic! Tel Aviv 25 Index advanced 12% and the US dollar lost 4% of its shekel value, so the market as a whole won 16%. My sails were set in a way that failed to catch the full power of the wind, and that because of my holdings of Teva which is slowing me. I think that it is the stability of the coalition that is the cause of TASE's euphoria: the attempt to destroy the coalition after the Second Lebanon War is failing, and also the personal attacks on the leading politicians have failed to produce results. Abraham Hirschensohn the Minister of the Treasury is being investigated for stealing, but he is still in power, Amir Peretz was attacked as inexperienced and incompetent for the task of Minister of Defense, and he is still the second most powerful man in Israel, and our President, who is being processed for serial rape, is planning to resume his ceremonial duties. Since Ariel Sharon we did not have such a robust and stable government. Secondly, Iran's rush towards the nuclear bomb is frightening the region, including Saudi Arabia and Egypt, and there is a compelling force to form alliances against Iran, including the strongest player in the area - Israel. Lately voices of acceptance and cooperation have been heard in the Arab world, something ungehoerd in Israel's 59 years of existence. Reason to be optimist. The flag is Israel's naval ensign.

TASE Time

I gave my brain freedom to wander around during this long and lazy Pessach holiday. TASE time, and financial time in general, runs in a different universe than universal physical time. According to Prof. Miller, physical time exists so that everything does not happen all at once, but financial time is necessary only as a window through which risk and uncertainty can climb into economic theory. When a market suffers from one of its occasional fits of volatility, for example, it could simply be that the financial clock has begun to tick faster. What clocks out to be a single hour’s worth of time in the physical world might very well translate into a day, a week, a month or even a year of financial time. Indeed, if one tinkers sufficiently with the financial clock, one can generate almost any volatility pattern that one desires without having to distort the underlying normality of the process generating prices and returns.

While financial time is only loosely related to physical time, the concept has a perverse elegance and furthermore is laughably obvious to any trader. The time signature of the symphony played by the interaction of the various financial markets changes constantly. Some of these changes are predictable — markets often open to a scherzo before settling down to a midday waltz — others are not. Markets also watch the calendar, while physics knows no season. Each market must keep its own time. A device for ticking off local financial time is to have trading volume serve as a metronome for the market. Hence, when a market is active, more financial time ticks away than when traders are napping or out to lunch.

The clock of Tel Aviv Stock Exchange is the strangest of all. Friday and Saturday stops - the market is closed and there is no off market activity. Sunday - when the markets all over the world are closed, TASE is active. TASE follows the ancient lunar Jewish calendar, and Jewish holidays fall arbitrarily with regards to universal calendar. TASE's trading hours are about 2 hours ahead of Europe and there is a one hour overlap with the NASDAQ - when TASE is about to go to sleep, NASDAQ starts its day. Since the main stocks in TASE are listed in TASE and NASDAQ, there is a very close linkage and TASE tries very hard to dance to NASDAQ's tune. The problem is that they are awake simultaneously and maintain intercourse only for an hour a day and that only three or four times a week. That may satisfy a somnolent exchange like Athens, but not the virile TASE.

TASE is also a small exotic market, and its Hebrew language makes it all but incomprehensible for the rest of the investing universe. It is a market visualized as extremely risky, sitting in the epicenter of a terror-infested region where Americans are beheaded on a daily basis. Therefore, it is little followed by the big players, leaving unexploited arbitrage opportunities to small boys and sucking babies like me. I need time and focus to develope some obvious arbitrage mechanisms floating in the back of my mind. The illustration is Prague's Altneuschul's clock.

300 - Xerxes's Story

Xerxes was Ahashverosh of the Chanuka celebration, the husband of Vashti and Esther, whose Prime Minister was Mordechai the Jew. His empire was the largest on Earth, a tolerant, multinational conglomerate, where the Jews were free and prosperous. The Greeks were amoral pederasts, talented talkers but unreliable and corrupt. Xerxes's speech:

“I am Xerxes, son of Darius, grandson of Cyrus who liberated the Jews from their Babylonian exile and sent them to Judea to rebuild their temple. I myself married Esther, a daughter of the Jews. I come from a long line of believers in the One God preached by Zarathustra, our Persian prophet whose teachings have influenced all other religions. I am now embarking on the conquest of Western Greece, a region populated by polytheists who worship amoral, capricious deities. But we have established a multi-ethnic empire that includes Ionian Greeks, who fill important roles from the Mediterranean to India. These Spartans confronting us at Thermopylae are cruel slaveholders who annually–for sport!– make war on the defenseless helots that live around them. They have nothing to tell us Persians—or the world in general—about ‘freedom.’!”

Blogging Will Get You Fired

Yet another hint that blogging is unhealthy. Maoxian, a stock exchange blogger, writes:

I came close to working for Bloomberg here (a schoolmate from Hopkins-Nanjing is Beijing bureau chief), but they didn’t hire me. It was either the blog that killed my chances (not likely?) or the fact that they didn’t like my writing style (more likely). It’s a crying shame because I would have busted my ass working there. (I did get “The Bloomberg Way,” their writing manual for reporters, as a parting gift.)

The Teuza Fund

On the rumor that an exit had been closed between the Teuza Fund and a company of its main stockholder Alfred Mann, I bought some shares on TASE for a fistful of mangos. Teuza means audacity in Hebrew, mango means money in lunfardo, the lowlife jargon of Buenos Aires. Apparently others are also buying, because the stock rised 1.5% in a day of widespread losses. Encomendando mi alma a Dios, I bought at the top.

Teuza Venture Capital Fund was founded in Israel, and began its activities as a publicly traded company in April 1992. At that time, Teuza raised funds from both the public and interested parties, in the amount of $22M. Teuza's shares are traded on the Tel Aviv Stock Exchange. Teuza's invests in venture companies in the field of software semiconductors, communications, electronics and medical equipment. Teuza is extremely involved in its portfolio companies, and has a representation on the board of directors of most. Teuza takes part in its portfolio companies' policy development, strategic planning and search for financial opportunities, and it maintains follow up of the companies' performances. Teuza's policy is to share its profits with its shareholders. Following two years of significant profits, in July 2001 Teuza distributed a cash dividend in the amount of NIS 45M. The total dividend per share was NIS 0.6876, representing 25% of the share's market value before ex-day.
Total company market value currently stands at about 150 million shekel (37 million US$) having a net equity worth of about 25M$.Since January 2004 the price per share of Teuza shares increased by 100%. So far, Teuza Fund has invested in 15 companies, in the total amount of $35M. Usually the company prefers to have a large equity stake between 25%-49%, so that every successful exit becomes very significant. Teuza has successfully exited from nine companies (partial exit from four of them). One of its companies had a very successful IPO on the USA NASDAQ. In April 2000 Nova Measuring Instruments Ltd., in which the original investment was $900,000, issued its shares on the USA NASDAQ stock exchange (at a post money valuation of $285M). Teuza had a successful exit from WaveAccess when Lucent bought the the company for $60M. The profit from this realization was about NIS 43M. Teuza realized its balance investments in Oramir that was sold to Applied Materials for 27M$. In the past Teuza realized its entire investment in A.B. Seeds. Most of Teuza's companies have completed their development stage and have begun to market and sell their products. The majority of these products are protected by patents and copyrights. The fund has at least one director on the board of directors of most of its portfolio companies. Many of its companies have received substantial grants from the Israeli Chief Scientist and/or the BIRD Foundation. It is anticipated that several of the portfolio companies will be exited in the near future. Teuza's policy is to involve strategic partners in its portfolio companies. Thereby Teuza creates the way for a successful exit, as was the case when Lucent bought WaveAccess for $60M. Teuza's strategic partners, past and present, include Intel Corporation, Johnson & Johnson, The Fairchild Corporation, Dow Chemicals, Lucent and Applied Materials.

Follow-Up April 16, 2007: Nada.

The Strange Things We Believed In

Robert Fogel is an American Jew, Nobel Prize in Economy, known for his study of slavery (the system was efficient and profitable, thus slaves were very expensive). He started as an electric engineer and then, for eight years, was a professional political worker, that is, a Communist agitator. Khrushchov's speech shook his faith making him return to Columbia and study economy.

There was a difficulty of escaping from the impact of the Great Depression and the influence of Keynesianism, one reading of which seemed to suggest that whatever had propelled capitalist economies during the 19th century and early part of the 20th century — major technical advances, the settlement of the frontier — had run out of steam. This view was common at Harvard, Princeton, and most of the other Ivy League schools. The profession had become pretty pessimistic about the future and feared that depressions would occur with some frequency. When I was beginning my graduate work at Columbia in 1956-1957, James Angell, who taught the macro graduate course, said that you couldn’t rule out the possibility that the economy was being kept afloat by wars. First, you had World War II and then you had the Korean War. So that uncertainty was still prevalent in the mid- to late-1950s, but I think it was beginning to shift as we started to see more technological change and export-led growth.

Some cities implemented drinking water treatment systems quickly but others didn’t because it was very costly. There is a very interesting article by David Cutler looking at the arguments in different cities for and against spending money on water-purification projects. It often took cities many years to finally go ahead and fund those projects. We have looked at the relative importance of such largescale public health programs and they did a great deal to expand life expectancy. Then there are issues regarding the preparation and distribution of food products. In 1900, about a third of cows in the United States had bovine tuberculosis. Even when dairies started to pasteurize the milk, it wasn’t very effective. There were a lot of contaminants that made it into the milk. So we probably didn’t get a safe milk supply until the 1930s. Poultry is another example. Kids now think that chicken is something that is manufactured in some plant. They don’t realize that it was once a living animal. When I went shopping with my mother and you wanted a chicken, the butcher would go in the back room and bring out a live chicken. My mother would feel its breast and say, “No, I don’t want that one. Bring me another one.” When she would finally choose one, the butcher would break its neck, chop its head off, and bring it back to us plucked and singed. That process introduced possibilities for contamination. Now, the purity of the food supply is very good — so good that when a problem slips through, it makes national headlines.

Investing in "Dogs"

I sense something in the wind. Kerkorian is offering cash for Chrysler, an American broken car maker, in an industry that is losing billions and fast disappearing. Buffet has bought a railway. A railway ! No one invested in a railway since the 19th century. Maybe railway is green and has potential? Eli Broad is buying a money and subscriber losing newspaper. A newspaper in the internet age! Why should anyone put good money into a dyeing industry? Are these dogs undervalued? Do they have unappreciated potential?

What would be the equivalent of those dogs in Israel? Textile industries? Polgat? Saturated polyhydrocarbons margarine factories? Shoe factories? Hungarian language newspaper Uj Kelet? Toxic sludge recycling (see pic)? Think boy think.

Syzygy Doctrine of Water

When I arrived to Israel ascended to Jerushalayim to visit my uncle M. z"l who lived in a very small apartment in Batey Hungarim. He was teacher in a Yeshive. When I told him I was a water engineer, he asked me if I knew that there are male and female water, and ceremonies to make irrigation to bring fruit. A hater of obscurantism and magic, I was shocked then as I am now. My uncle z"l was a very friendly person, a leader in his community, with the very clear blue eyes of my Mother and the Abelesz family. During the next 31 years my brain was collecting data on the subject and now that I have time and place to write, I shall note down that kabbalists believe in the ancient doctrine that "All that God created in His world, He created male and female" (B. B. 74b; comp. Ḥag. 15a, "mountains and hills," and R. H. 11a). God made man out of the dust of the earth (Gen. ii. 7): "dust" ("'afar") is masculine, "earth" ("adamah") is feminine. The potter also takes male and female earth in order that his wares may be sound (Gen. R. xiv.). The doctrine of the division of the waters into male and female is intimately connected with the gnosis of the Creation. R. Levi said: "The upper waters [rain] are male; the lower waters ["tehom," the great water in which the earth floats] are female, for it is written [Isa. xlv. 8]: 'Let the earth open [as the woman to the man] and bring forth salvation [generation]'" (Yer. Ber. 14a, 21; comp. Pirḳe R. El. v. and xxiii., "male and female waters"). The rain is called "rebi'ah" because it mingles with the earth (ib.; Simon b. Gamaliel, 2d cent.). The rain is the spouse of the earth (Ta'an. 6b, where the expressions used are "bride" and "groom"). These 31 years have softened my brain, making me less immune to gnostic nonsense.

The Illusion of Precision

Having some free time I googled who this very intelligent Falkenstein is and improbably, he seems to be one of the musclemen pictured above. Apparently we share the experience of imbecile bosses who demand absolute precision and consider imprecision as a confession of professional incompetence. My former boss in haNetzivut demanded precise figures of wastewater flow, and would not accept that the flow varies from hour to hour and from year to year, and that in Israel 2004 there were almost no functioning flowmeters. On the other hand, I remember the statistical information collected in Mexico with Avigdor Bar Hay, precise to the point of 2,300,034.65 chickens in a departamento de secano. Falkenstein says that confusion to the capital allocation process comes from the spurious precision that results from applying an extremum to a default probability. The usual result leads to a targeted 99.95% annual nondefault rate. As a practical matter such precision is counterproductive and misleading. You can't calibrate a system to this level of accuracy, so it can't be relevant (though many physicists, who have no intuition for the data, wouldn't know this). The sensitivity of such estimates to assumptions such as time horizon, volatility, correlations, marginal volatility contribution and distribution are so large that it is impractical to expect this number to achieve any meaningful consensus. A firm would either have to wholly delegate the power of capital estimation to a single person or expect an endless debate. S&P looks for 4-5 times lifetime expected losses on auto ABS for total subordination necessary to get to AAA. He says that you have to admire the recognition of imprecision in that sort of rule of thumb.

Sparta

300 is a powerful film about the battle of Thermopylae 2500 years ago. The film is based on a Sin City cartoon, so the critique that it is ahistoric is irrelevant. The cartoonesque representation of the fight as a mano-a-mano bothered me, since I was aware that Spartans entered battle heavily armed with breastplates and fought as a collective body in an obedience-to-death (say it in German) disciplined hoplite phalanx. The push and ease (tira-y-afloja) scenes at the start of the battle looked real to me - that is the way it must have been. Very good scene. Leonidas was the leader of some 7000 Greek soldiers, but they are mostly unseen in the film. The representation of the Arian Xerxes as a quasi-Nubian giant is ludicrous, and pederasty was a Spartan speciality and uncommon among ancient Parsis and Medes. I loved the two scenes where Persian gold is shown corrupting Hellenes, the mechanics of corruption as well the physical beauty of the gold are remarkable. America is in war against some Middle Eastern peoples and the film is strongly political and patriotic, but the amazing thing is how such a powerful political instrument gets made spontaneously, by the blind forces of the marketplace, without any State directives. Russia and China maintained dedicated ministries for political culture and never succeeded in making works nearly as beautiful and impactant as 300.

Risk according to Falkenstein

This was a boring Hol HaMoed (Semana Santa) Shabbath, so boring that I took out from my library an old manual of statistics in Spanish and entertained myself reading about poisson, chi square, bayes, logistic curves, etc. Then I read an old (7/2006) note in Statsny's Mahalanobis blog. He asks why risk is in the real world unrelated to return ("empirical irrelevance of risk to returns" in his ecclesiastical Latin) and analyses Erik Falkenstein's paper. Thinking in images (if it can be called so what I do) I can see a band of chimps where each individual perceives risk as his distance from the band's norm. A chimp feels secure doing what the band is doing and evaluates risk as his distance (physical, social) from the groups's center of gravity. But let him explain it: "One of the first things you teach someone in finance, or even economics, is that risk is related to return. You can only get higher returns by taking higher risk. True enough. But is it true 'on average': more risk, more return? If not, why not? In finance there’s a specific definition of risk relating to the covariance of an asset with some nondiversifiable factor (eg, the market portfolio, a metric of total financial and human capital). Developed in the 1960’s, it’s the crowning achievement of finance, an integration of statistics with utility theory. It’s elegant, relatively simple, and slightly surprising (idiosyncratic risk is not priced). But it’s also empirically vacuous. Even die-hard efficient markets proponents agree that however betas are measured, they don’t generate a nice scatter plot with increasing returns (let alone linear in the factor sensitivity). The failure of beta for cross-sectional equity pricing is but one example of the failure of the risk-return theory (assumption?). 30-year bonds have the same returns as 3-year bonds on average, in spite of considerably higher volatility, beta, and a negative correlation with inflation. Private investments that are intrinsically undiversified positions due to agency issues—franchises and the like—produce no premium over the S&P500. Recent papers have documented that traditional high risk areas—distressed securities in danger of bankruptcy, high idiosyncratic volatility, or firms with greater earnings forecast dispersion—generate lower returns than average. Corporate bonds show no reward for taking on credit risk (current B-rated yield spreads are below their expected loss and therefore should generate below AAA-rated net returns). Add to that diverse findings, such as that lower variance G-rated movies generate higher returns and less variance than R-rated movies, or that long-shots have the lowest net payout at the racetrack, or that long-shot lotteries are more popular than lower-risk/higher-payout lotteries, and it appears that there is either no correlation with 'risk' as traditionally defined, or a negative one.

This all reminds me of the theory of aether, a substance that supposedly permeated the universe and was consistently found absent. In the late 19th century a good way to academic success was to invent refinements that explained why it couldn't be measured, much like current papers that prove that under certain conditions, there's no beta correlation to return (of course, these then fail in their other implications, such as Roll and Ross's critique that mismeasuring the market generates no return correlation to beta, but as the correlation between idiosyncratic variance and returns is actually negative, this wrecks that angle because idiosyncratic variance should pick up mismeasured factor loadings). To these people, risk is like facial recognition, something common and intuitive yet exceedingly difficult to model abstractly. The Michelson-Morley experiment of our field was Fama-French in 1992, confirming what researchers all knew, and since then everyone accepts the empirical failure of CAPM as the rule, not the exception. Isn't data the ultimate arbiter of theory? He explains this as a consequence of people caring about their relative status, rather than absolute wealth. In such an environment, nondiversifiable risk becomes like diversifiable risk in the traditional CAPM, avoidable, so unpriced. All you have to do is assume people care about relative wealth and using arbitrage or utility theory, risk is not related to returns. A beta=0 asset has the same risk as a beta=2 asset to someone benchmarked against the market. The paper presents a simple model, and goes over the empirical evidence with copious references. There’s actually been quite a few models using a relative status approach for various parochial problems, so it’s not novel in that aspect, it just takes the approach to the general problem of risk and return. And all the general normative implications for volatility retain, including the desire to hedge, or buy insurance (though not, say, Global Warming insurance). There is one big seemingly counterfactual implication: that the equity risk premium is zero. I address this by noting that the equity risk premium used to be estimated at around 8%, and is now generally estimated around 3.5%, so another 3.5% is not farfetched. Further, that estimate ignores transaction costs, and peso-problems in equity indices, which takes this to zero (is the marginal investor the Vanguard500 investor? A high volume/expense day trader? It should be noted that the traditional model generates only a 0.35% risk premium for plausible parameters, so this isn't as contrary as it seems (any outside-the-box refinement to the traditional model could well be applicable to this one).

Falkenstein (pic) says that love of power over men (and the implied greater access to women regardless of aggregate wealth) is a base instinct no less petty or universal than greed. Economists should not shirk the implication because as dismal scientists, we draw the line at greed, not envy. It’s not a normative theory, just a positive one (ie, descriptive, not prescriptive). Not only can a relative status utility function explain the absence of the risk aether’s effects in markets, but it can potentially explain other issues, such as the home bias (people are more concerned about their income relative to their countrymen, not the world), endogenous instability (a world where ‘no risk’ is defined as what everyone else is doing has some arbitrariness), and why aggregate happiness is stagnant in countries 5 times as wealthy as 70 years ago (the rat race is unaffected).

Analysis of a Failure

Five years ago the TelTech index of TASE was rising like crazy and several startups had been sold to large American corporations for hundreds of millions US dollars. I wanted to connect to the prosperity and found out that Bank HaPoalim was launching a closed fund for investing in startups. The Bank was to invest 50 million dollar from its own capital and 50 mill. was to be raised by selling units to private clients of the Bank. Each unit costed 40,000 shekels, some 15,000 dollars. The Fund was not publicised and was nof offered to me, but I insisted and fought and got in in the last minute. I thought it was the best way to invest in startups, as the Bank had many inside contacts in the field and knew what to do. I succeeded in buying two units. Udy, the investment boss, was renuent to sell it to me. I was not in the inside clique.

Well, then came the crash of the Teltech market. In the first end of year brochure, I got an idea of what the Fund was doing with my money and how much it was costing me. I was shocked that their first investment had been in ALFI, a firm started by an idiot of Tel Aviv University, which pretended to exploit the internet market of 1 - 3 years old babies. I had been exposed to the concept in TAU and had been wondering what kind of idiots were promoting ALFI. The other investments seemed to me naive and non-commercial, like a faxing service through the internet and so on. But it was too late, I had paid 80,000 shekels. The management took 2,000,000 shekel for its expenses.

The second year most of the investments were valued zero and the fund lost half of its worth. In the third year exited one startup and paid dividends while reducing even more the worth of the Fund. Given the loss, management expenses were posponed so nowadays there is a large debt to the Bank for the management expenses.

The original idea was to float the fund in the stock exchange, but of course it cannot be done since its concept failed. So it was decided to dissolve the Fund in the end of 2007. Its book worth is about 20,000 shekel per unit, meaning that I lost about half of my investment (I consider the dividends paid out as interest and indexation). I hope to receive some money at the dissolution of the fund, but I am not sure there will be any left.

What do I learn from this bad failure?

(1) Never, never ever give your money to "experts" whom you think "they know better". Even if it is the biggest bank in Israel. Dont believe they are more intelligent than you or that they have special knowledge or experience! Most probably they are imbeciles! Even if they are not, they dont care for you, they work for themselves!

(2) Before everything, understand how the thing works and make money. Study very carefully the situation! The fact that the papers published a few extreemely successful exits hid the fact that hundred of startups were struggling and that many more just faked having a product. If you personally dont understand how it will make money, most probably the concept is a hoax.

How to Profit from American Inflation?

Condor Advisers write: In addition to rapidly increasing political instability, growing pressure in the US Congress for the devaluation of the dollar will also undermine support for the greenback. Democrats, who now control Congress, have long lobbied for the revaluation of the yuan and yen against the dollar. Revaluation of the Chinese and Japanese currencies means devaluation of the dollar. The political pressure for dollar devaluation ratcheted higher late last month after the announcement by US auto maker Ford that it lost US$13 billion in 2006. This record loss surpassed the record loss posted by General Motors in 2005 of $11 billion. While some of these enormous losses can be pinned on very high health-care and retirement costs burdening US auto makers, much of the blame for these losses is landing squarely in Tokyo for its weak-yen policy. Backed by US manufacturers and their unionized employees, Democrats in Congress are also vilifying Beijing for its weak-yuan policy, which has helped push US imports from China to dizzying levels over the past several years. In the coming months, Democrats are likely to push strongly in Congress for legislation calling on China and Japan to take action to strengthen their currencies - at the dollar's expense.

Though inflation expectations in the United States are now heading higher, the Federal Reserve continues to resist pushing official interest rates higher for fear of provoking an economic recession and widespread losses among US banks, which are very vulnerable to mortgage defaults. Though economic growth in the US is widely expected to slow in 2007, US stock markets continue to move higher, making equities increasingly overvalued. Finally, as the prices for many dollar-denominated agricultural goods double in 2007, many of the world's central banks will encourage the appreciation of their own currencies in order to contain imported inflation. The only factor supporting the dollar is the misunderstood contention that interest-rate differentials favor the greenback. In nominal terms this is true. However, real yield differentials favor most other currencies, even the yen, against the dollar. Rising inflation in the US will further widen real yield differentials in favor of other currencies against the dollar during 2007. The dollar's swoon appears inevitable in the coming months. As the value of the dollar drops, US asset markets will also swoon. Against this background, precious-metal prices will head sharply higher as investors increasingly diversify out of dollar assets backed by weakening profit outlooks and falling real yields.

The shekel is strengthening as will Israeli stocks. Commodities will rise, shares of companies based on export to the US will stagnate. Those like Africa-Israel, based on Russian will continue rising. The yuan will have to rise, and with it the value of Chinese stocks, but expensive yuan is bad for Chinese exports.

Irresistible

I had to have this pic in my Secret Diary.

Follow Up & Now What?

In January 2007 I wrote:

I have finished the rearrangement of my portfolio and is set to catch the winds and move onwards. The main sail is Teva, Machteshim Agan and Israel Chemicals; then the smaller sails to catch the higher and stronger winds - made up of Kesem Sin, Kesem 30, Delek, Summit, HaHevra LeIsrael, etc. Then, in the highest level, small specialized sails to catch the wild winds of speculation, like PUT options on the price of oil futures, Ahora Options, Tower, Anter Holdings and a few more. Since the price of the oil has stabilized and Israel's economic situation is very good, I hope to catch the coming winds and move up some 30% in two or three months.

Well, we are now in April 6th., and my portfolio made exactly 30% in these three months. When I put my mind on something, generally I succeed. How I feel? Sad. Empty. Unexcited. Now What? The Economist writes and I agree:

Much of the world is directly or indirectly influenced by American monetary policy, often because countries have linked their currencies to the dollar (China and Russia are obvious examples). The Federal Reserve may well be thinking about cutting interest rates later this year for domestic reasons, notably the problems in the housing market. But that decision, while entirely appropriate for the American economy, may be completely inappropriate at the global level, in particular for emerging markets. Cutting rates will only inflate the emerging market boom. Emerging markets could offset the effects of lower American rates by allowing their currencies to rise, but they may be reluctant to do so. If they do not, commodity prices may climb even further, increasing inflationary pressures in Europe and America. If HSBC is right, the best way of speculating on lower American interest rates might not be the purchase of short-dated Treasury bonds or even equities. Instead, investors should plump for commodities and inflation-linked assets.

What is saying, I presume, is that dollar will inflate and emerging market stocks and commodities will prosper. The Israeli shekel has been rising lately - our Central Banker is an American who lost the Fed Pres post to Bernake, so he knows. The Chinese yuan is much undervalued, so a correction may be increasingly necessary too, but the Paramount Leaders will not allow it. If so, are Chinese stocks cheap or expensive? Very cheap.