Monthly Archives: October 2015

China’s economy is NOT slowing

Pet peeve alert.

The economy in China is growing at a slower rate, measured by %GDP, than it has been in recent history.  The second order measure of the economy, the growth, the derivative, is slowing.  The economy itself is not slowing.

Where does this misconception show up?  All over the place.


NYT – The headline gets it wrong.  The details in the article get it wrong, then right.

Motley Fool – Again, wrong in the headline.  Correct in the details, as well as the subheading.

USA Today – Same thing.

The average person does not understand the difference, and many think that the Chinese economy is, in fact, slowing, like when we have a recession.  Negative growth.  In fact, the nominal amount of growth in the Chinese economy is far higher now than a few years back when it was 10%+.  Why?  Starting from a much bigger base now.

China is growing.  A lot.  The rate of growth is slowing, but it is still continuing to get much, much bigger every year.

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Nanotechnology in Medicine

From University of Michigan:

Cardiac arrhythmia is caused by malfunctions in a certain type of heart muscle cells, which normally help regulate the heartbeat. Today, the disease is usually treated with drugs, which can have serious side effects. It can also be treated with a procedure called cardiac ablation that burns away the malfunctioning cells using a high-powered laser that’s threaded into the heart on a catheter. The laser also damages surrounding cells, which can cause artery damage and other serious problems.

The team, led by Jerome Kalifa, a cardiologist and U-M Medical School assistant professor of internal medicine and Raoul Kopelman, a chemist, materials scientist and the Richard Smalley Distinguished Professor of Chemistry, Physics and Applied Physics, set out to target and destroy the cells with a far more precise technique that uses low-level red light illumination instead of a high power laser. Widely used today to treat cancer, the technique requires doctors to mark unwanted cells with a chemical that makes them sensitive to low-level red light. The red light then destroys the marked cells while leaving surrounding tissue unharmed.

The team tested a treatment that delivers the photo sensitizing chemical (made from algae) to the targeted cells by injecting nanoparticles loaded with both the chemical and an amino acid-based peptide that causes the nanoparticles to be taken up only by the targeted cells. Red light is then delivered to the area using a procedure similar to today’s cardiac ablation. The low-level light destroys only the cells that have absorbed the nanoparticles, leaving the other heart cells unharmed.


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Gut Biome and Brain

From NPR.  The article is titled “Could Depression Be Caused By An Infection?”  I think this title is really incomplete, because they implicate bacteria, viruses, and protazoa, and the relationships between each of these and inflammation and autoimmune disease.  The quotes below also suggest that the gut biome, as part of the immune system, must necessarily also be involved.

“The truth of the matter is that there is probably a subset of people who get depressed in response to inflammation,” says lead author Dr. Charles Raison, a psychiatry professor at the University of Arizona. “Maybe their bodies generate more inflammation, or maybe they’re more sensitive to it.”

How infection and other causes of inflammation and overly aggressive immune activity may contribute to depression and other mental illnesses — and whether or not it’s actually depression driving the inflammation — is still being investigated, and likely will be for some time. But plenty of leading psychiatrists agree that the search for alternative pathologic explanations and treatments for psychiatric disorders could help jump-start the field.

“I’m not convinced that anti-inflammatory strategies are going to turn out to be the most powerful treatments around,” cautions Raison. “But I think if we really want to understand depression, we definitely have to understand how the immune system talks to the brain. I just don’t think we’ve identified immune-based or anti-inflammatory treatments yet that are going to have big effects in depression.”

But the University of Toronto’s McIntyre has a slightly brighter outlook. “Is depression due to infection, or is it due to something else?” he asks. “The answer is yes and yes. The bottom line is inflammation appears to contribute to depression, and we have interventions to address this.”

McIntyre notes that while the science of psychiatry has a long way to go, and that these interventions haven’t been proved effective, numerous approaches with minimal side effects exist that appear to be generally anti-inflammatory, including exercise, meditation and healthy sleep habits.

Clearly, trying to maintain the gut biome that is best for each individual will go a long way toward not just physical health, but also mental health.

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FBI Director Comey on “The War on Police”

From NYT:

The F.B.I. director, James B. Comey, said on Friday (October 23, 2015) that the additional scrutiny and criticism of police officers in the wake of highly publicized episodes of police brutality may have led to an increase in violent crime in some cities as officers have become less aggressive.

With his remarks, Mr. Comey lent the prestige of the F.B.I., the nation’s most prominent law enforcement agency, to a theory that is far from settled: that the increased attention on the police has made officers less aggressive and emboldened criminals. But he acknowledged that there is so far no data to back up his assertion and that it may be just one of many factors that are contributing to the rise in crime, like cheaper drugs and an increase in criminals who are being released from prison.

“I don’t know whether that explains it entirely, but I do have a strong sense that some part of the explanation is a chill wind that has blown through American law enforcement over the last year,” Mr. Comey said in a speech at the University of Chicago Law School.

Mr. Comey said that he had been told by many police leaders that officers who would normally stop to question suspicious people are opting to stay in their patrol cars for fear of having their encounters become worldwide video sensations. That hesitancy has led to missed opportunities to apprehend suspects, he said, and has decreased the police presence on the streets of the country’s most violent cities.

“I’ve been told by a senior police leader who urged his force to remember that their political leadership has no tolerance for a viral video,” Mr. Comey said, adding that many leaders and officers whom he had spoken to said they were afraid to address the issue publicly.

“Lives are saved when those potential killers are confronted by a police officer, a strong police presence and actual, honest-to-goodness, up-close ‘What are you guys doing on this corner at 1 o’clock in the morning’ policing,” Mr. Comey said. “We need to be careful it doesn’t drift away from us in the age of viral videos, or there will be profound consequences.”

Not really addressed in this article:  Data showing what “rise in crime” he is referring to.

Also not addressed:  Why the hell makes anyone that the police “confront” a potential killer?  Why do police need to “confront” people who are not appearing to break any laws?  Whose lives are saved?  Certainly not those being confronted.  This guy does not understand cause and effect.  Why do cops have to “confront” as a first reaction?  They should be in the business of deescalation.

More evidence of not understanding cause and effect:

In February, Mr. Comey delivered an unusually candid speech at Georgetown University about the difficult relationship between the police and African-Americans. Some officers, he said, scrutinize minorities more closely using a mental shortcut that “becomes almost irresistible and maybe even rational by some lights” because black men are arrested at much higher rates than white men.





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How we think

From Dynamic Hedge.  The author has a friend who suffered an injury resulting in short term memory loss.  Each time he went to see him, they repeated the same conversations, with his friend offering the exact same responses every time.

Two brain analogies

Imagine a massive house or building. Each attribute of the building represents something unique that make us who we are. Things like our genetic predispositions, our personality, cognitive biases, our ethical constructs all form this one-of-a-kind building. Reality comes to us like weather. The wind blows, rain falls, or a child bounces a ball off the door. Depending the design of your house the water may pool in some areas, and the child’s ball may rebound wildly depending on the shape of the door. Our interactions with others are simply bounced back off our emotional exterior with the same predictability as a ball bouncing off the side of a house. The house is built the way it’s built, and there’s little choice in how things interact. And mostly nothing we can do to stop the govern the responses except to go through the painstaking process of changing the structure. Call this the fortress paradigm.

Now, imagine a bus driver standing behind a giant steering wheel. The driver is navigating intersections of choice as he travels life’s road. However, it’s not easy to steer because the bus filled with backseat drivers representing our genetic predispositions, our personality, cognitive biases, our ethical constructs, or even a spontaneous emotional state. Sometimes the passengers reach for the wheel and try to steer the bus themselves. Nevertheless the driver can see intersections and decide to turn left or right, and those decisions feel like real choice. In this world, all we have to do is quiet the backseat drivers to adjust our true course. Call this the bus driver paradigm.

In my view, my friends behavior shows that we are probably more fortress than bus driver. Interacting the same way over and over again seems to implicate he was bouncing back reactions more than he was consciously considering them. These reactions were wholly unique to him but such minor variation in his patterns (not just reacting, but initiating jokes, etc.) leads me to the conclusion that he had little conscious authorship in the interaction. It happened again and again. To believe he was more of a bus driver would mean that he might have different reactions, if only once in a while.

What does it mean?

I never imagined myself as an immovable object with outside events bouncing off me, predetermined by physics. For my entire life, I imagined my consciousness and decision-making capability similar to that of the bus driver. However, seeing my friend work through the same interactions with people over and over again made me think that there may be some things burned into the deeper levels of our psyche that we have no control over. Potentially, some facets of what we consider our “self” may be even deeper than even the subconscious and exist in our nervous system or some other aspect of out physiology. Philosophy on this topic is clearly beyond my expertise, but my experience (rather than intuition) makes this possibility hard to ignore.

If our identity and behaviors exist on a more primal level than consciousness, it explains why self-help leaves many disgruntled and why personal development is so difficult. The self-help industry emerged and profited greatly from the boomer generations growing self-consciousness that behavior may be the root of their problems. While this might be true, the reason many people become disillusioned with self-help is because they underestimate the difficulty that meaningful change requires. Altering a fortress is no easy task.

There are a couple very positive conclusions I come to based on my experience. One of them is that if you believe you are more fortress than a bus driver, listening to others is more valuable than ever before. The easiest way to take yourself off your default “story path” is to shut up and listen more.

This reminds me of Kahneman’s system 1 and system 2 thinking.  We must make an effort to use our brains.

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Technical Analysis

Not a believer.  This post from Andrew Adams at Raymond James kind of nails it.

I am convinced that momentum trading, which is a part of technical analysis, has merit.  Because math.  But when I read “We have written frequently about the probable “W” or “double-bottom” pattern that this market appears to be in the process of making, and we have mentioned how bottoms themselves are processes and often take time to form,”  it just reminds me of the South Park episode featuring the TV medium.

In addition, he shows us this chart:

Ridiculous and completely irresponsible.  These charts pop up frequently.  In fact, during that drawdown in 2011, I’m pretty sure I saw a whole bunch of charts overlaying that market with the crash of 1929.  Have not seen the updates to those charts, LOL.

I’m not saying the market can’t do what he is suggesting;  maybe it will.  Or not.

The only reason that drawing lines on charts makes sense is that a bunch of people are doing it and acting on it, so it may be that if you draw the same lines as a bunch of other investors, there can be a self-reinforcing trend.  That is, it might work a little because people think that it works and act on it.  Other than that, yeah, cartoons.  I keep meaning to learn more about it because I might be really wrong here.

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Check your assumptions: Correlation

As I noted in a previous post, measurement of correlation varies wildly (even in sign) when measured at different time scales (day, week, month).  Everyone knows it varies over market cycles, with correlations often increasing toward 1 in times of market volatility.

Over longer time periods, though, there seem to be stronger patterns.  William J. Coaker II publishes on this topic.  Here’s a good one.  He looks not at average correlations over time, but ranges of correlations over time.  When examined in this way, the choices for low correlated assets become more clear, and the case for diversifying using assets identified this way is even stronger than using average correlations.   He also notes that behavior of assets can be categorized in unexpected ways when analyzed in this way.  That is, growth stocks as a class behave essentially equivalently to blend, but value is different from them both.

Liu Xinyi and Hua Fan have also looked at how correlations change over time and in relation to one another, specifically for US stock and treasury asset classes.  Larry Swedroe has summarized their findings, which focus on predictive uses for correlations.

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Check your assumptions, DeLong edition.

Peter Gourevitch wrote an article for the Washington Post about Federal Reserve policy, with the click bait title “This is why Paul Krugman is wrong about the Federal Reserve.”  In it, he discusses how Krugman criticizes political decisions, both the substance and the verbiage.

Brad DeLong has written a “complete rejection” of this article.  I think DeLong misunderstands the point of Gourevitch’s analysis.

What it really comes down to are Krugman’s assumptions and definitions.  Gourevitch questions these assumptions:

Economists tend to assume that there is a single right answer (even if they disagree bitterly among each other about what the right answer is). They explore what is “correct” from a theoretical point of view and are puzzled when their “correct” ideas are not followed.

Political scientists don’t usually start from the basis that there is a single correct way to do things. Instead, they assume that there is more than one interpretation of what is correct, and try to come up with theories about which “correct” answer is chosen. There is no correct answer when there are competing rival views that are not easily testable in a complex world where one cannot readily carry out controlled experiments with obvious real world interpretations.

Instead, what is “correct” is about judgment and values. It is also about who benefits, who gains, who loses and how. The tolerable levels of unemployment and/or inflation are at some level matters of value, not efficiency.

This is not to say that political scientists don’t have their own hidden assumptions lurking behind their investigations of social reality. But these assumptions may be democratic rather than expert-driven.

A full account of the battles over the Fed policy would require us to step beyond asking bankers and economists what they think and even asking economists what they think. We might instead ask the media to broaden its coverage, by asking a wider range of people about what is “correct” than “just” the economic theorists.

As there is usually more than one interpretation of what is correct, theory is not likely to give us a good explanation of what actually gets chosen. And it is not likely to tell us actually what is best from a democratic point of view, taking into account all the benefits and losses to a wide range of the population.

Instead of relying on expertise, we should figure out what people actually want from policy (and map the forces that block or channel their efforts to express and act on their desires).

DeLong rebuts:

For more than a hundred years there has been a broad near-consensus among economists that there is such a thing as a “correct” monetary policy.

Paul Krugman’s point is that the consensus of the 1980 MIT macroeconomics posse is that right now a higher inflation target than 2%/year is appropriate and that raising interest rates is not appropriate. “Opinions of shape of earth differ” or even “There is no correct answer when there are competing rival views that are not easily testable in a complex world where one cannot readily carry out controlled experiments with obvious real world interpretations…” simply does not clear the bar as a criticism.

…every monetary economist worthy of the name has sought a government and a central bank that will pursue a monetary policy that makes Say’s Law true in practice even though it is false in theory. Everyone has sought for a policy that makes the demand for money in conditions of full employment equal to the supply, so that we have neither an excess demand for money and Keynes’s inexpedient Deflation, nor an excess supply of money and Keynes’s unjust Inflation.

There is a single right answer in monetary policy. It is the policy that hits this sweet spot.

Fed policy is intended to control the 2 part goal, inflation and employment.  In order to do this, they typically take actions that we are taught in introductory econ classes will impact GDP (whether or not the Fed actions actually do have these effects in the way that we are taught).  Krugman is assuming that this goal is correct (whether or not he agrees with the actions proposed or taken).

DeLong also starts with Krugman’s assumption that the two part goal of 2% inflation and 5% unemployment is correct, and concludes that there is certainly a right answer, and it is obviously the one that results in that perfect economy balanced eternally at those numbers.  I think DeLong is adding in here an additional assumption, which is that Fed policy is capable of achieving the stated goal.

Gourevitch suggests that what the governed population wants from Fed policy may not be the attempted micromanagement of the global economy, or of the American business cycle.  Especially with these goals being chased in ways that are likely to have second and third order effects that do not appear to be part of the Fed’s consideration.  He is questioning both of these underlying assumptions.  John Hussman has an outstanding post examining how the assumptions regarding Fed actions and their consequences are largely false anyway.

Update:  Krugman has now addressed this himself, as well.  He missed the point, too.

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Tesla Powerwall competition

I’m pretty sure this is exactly what Elon Musk had in mind when he announced Powerwall.

From Yahoo News:

As renewable-energy use becomes more widespread, energy storage could become a major business.

Using stationary battery packs to store energy increases the effectiveness of wind and solar.

Tesla Motors hopes to exploit this potential market with packs that use the same lithium-ion cells as its electric cars.

But researchers at Harvard believe there is another configuration that could better suited to energy storage.

Professor Michael Aziz and his team are researching flow-cell batteries, believing they have certain properties that make them a better choice for this type of use, according to Gizmag.

This is wonderful news for Tesla, as well.  They will be able to use their battery factory to produce batteries for their cars and for other cars.

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A Critique of John Hussman’s Chart of Estimated Future Equity Returns

Source: A Critique of John Hussman’s Chart of Estimated Future Equity Returns

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