Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

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DRY GULCHED

Zerohedge highlighted the Baltic Dry Index “crashes to new 29-year low” late on Feb.4. Tony Sagami (Mauldin Economics) sent out emails to paying subscribers the next day, adding the likely consequence to hit us all:

Baltic Dry Index Plunges to All-Time Low: Stock Market Soon to Follow

The Baltic Dry Index (BDI) tracks the demand for moving those raw materials across the oceans and is one of the most important leading indicators of the global economy.

That’s because raw materials are the building blocks for the world economy: coal for power; iron ore for steel; and copper for everything electronic.

Sagami then blames the Fed’s ZIRPs and QEs as well as all other central bankers of the world, concluding with:

The stock market can’t ignore the rapidly deteriorating economic fundamentals forever, and the world’s central bankers are about to run out of bullets, so don’t let these manic sessions discourage you from what will soon lead to an even more painful fall.

The “Rational Bear”, as he calls himself, is probably half-hibernating because most awake people know that the Baltic Dry Index has become useless for investors other than those investing in the dry bulk shipping industry. In effect, the massive growth in demand for commodities during the early 2000’s from emerging countries, mainly China, led to an 85% increase in dry-bulk shipping capacity since 2008 and continuing to this day.

The dry-bulk market has been sunk by a perfect storm as an armada of new ships, ordered after the financial crisis, have hit the seas just as Chinese economic growth has slowed and commodity prices have taken another lurch lower. (FT)

The size of the world’s fleet of dry-bulk ships far exceeds demand for the vessels which carry commodities like iron ore and coal, with over capacity estimated at around 20% above demand over the past few years. Many ships ordered at a time of booming global trade before the 2008 financial crisis have come into service as economic growth has spluttered in the years since. (WSJ)

BTW, as many as 750 new dry bulk ships were ordered in 2013…

A little more research might have made Tyler Durden hedge his comments (not his style, really, as per the blog’s name) or changed the slant of our rational bear:

The HARPEX Shipping Index is the container ship index of the ship brokers Harper Petersen & Co. It tracks the weekly container shipping rate changes in the time charter market for eight classes of all-container ships.

HARPEX is regarded as a Current-Activity Indicator, because it measures and charts the changes in freight rates for container ships that typically carry a wide variety of finished goods from a multitude of sellers. These are factory output goods headed for retail markets, at the other end of the supply chain from the raw materials of the BDI.

Here’s the Harpex as of Jan. 31, 2015:

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As to the the usefulness of reacting to “one of the most important leading indicators of the global economy”, whatever that might be, Sagami could get out of hibernation and read GMO’s Ben Inker. He would find these two charts in his recent article Ditch the Good, Buy the Bad and the Ugly:

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It is one thing to be rational, but one must also be well informed, thorough and forthright. That said, with a name such as the Rational Bear, why should we expect anything positive from him?

BEARNOBULL’S WEEKENDER

The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.

Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.

Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.

(…) Humans are inherently bad at predicting the future. It’s a defect all too apparent in the corporate world, and in the business of managing complex geopolitics.

But some people have better track records than others, and the ways in which they think about questions and arrive at their projections offer clues as to how the rest of us might become more successful forecasters.

A group of researchers isolated these traits in a study tied to a geopolitical forecasting tournament arranged by an R&D group run by the US director of national intelligence. (…)

The best forecasters were the brightest, both in terms of cognitive ability and political knowledge. But many other traits and behaviors mattered as well. Thinking style is important; people who are actively open-minded performed significantly better. They’re much more willing to consider unorthodox ideas or results, and to stray from the theories and beliefs they’re comfortable with.

(…) The researchers found that being instructed to recognize and avoid bias and to use outside views had a huge impact. So did training in probabilistic approaches, like using forecasting models to average the likelihood of all possible outcomes for a given question. People who simply spent more time pondering each question also did better, as did those who habitually updated their forecasts when new information came in.

Feedback and attitude matter, too. Over the course of the tournament, team members got frequent updates on their Brier scores (a measurement of the accuracy of probabilistic predictions) and how they compared to those of other participants in the exercise. Those who saw forecasting as a skill to be developed and responded to the feedback were more accurate.

Teams are (much) better than individuals

The tournament lent itself to an experiment where people could be divided into a range of different work environments. Some of the University of Pennsylvania’s 743 team members—computer scientists, mathematicians, and financial investors among them—worked on their forecasts independently. Others worked in groups of up to 15 where they could freely debate and share predictions. The groups were trained extensively in how to work well together to help their teammates produce better forecasts.

The people working in groups performed significantly better than those working alone, with forecasts that were about 10% more accurate. Working in a team boosted the effect of other positive attributes, like intelligence and open mindedness.

There are negative aspects to working on a team, like the potential to mistakenly follow a crowd, or the tendency to end up in factions. But the positive aspects—such as the opportunity for dissent to arise, the diversity of knowledge to draw on—outweighed them.

The reality remains that forecasting financial markets is a fools’ game. Using factual historical data to gauge probabilities of future trends and adjust the asset mix based on individual risk aversion profiles is the only sensible way to go.

We can safely assume that robots will shortly replace most forecasters. Shimon and the Shimis are not yet there but what they do is nevertheless music to our ears…

Rest assured that when our future robotic overlords come on the scene, they’ll have a sweet sense of rhythm.

The Robotic Musicianship Group at Georgia Tech has been working on Shimon, a musical robot that can improvise melodic accompaniment, for about six years now. And for three years, they’ve added Shimi — a small, smartphone-connected bot that can respond to music with dance and sound — to the mix.

6 amazing minutes: http://wapo.st/1CgKPWD

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