Running markets without walras and schumpeter

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Chance, which is nothing but the want of art,” John Arbuthnot (1692)

Portfolio managers cannot tell us why, markets mumble and stumble! They condition us to buy shares, they do not make them, mumble, caveat emptor.
Not then and still not now can the economists say, either, it seems! Classical, monetarists, medallists, Salty or Freshie, Bastian, Bayesian, Austrian, Keynesian, Modern or Texan all with their closed macro over micro models of nuanced terms in separate languages, Babel, babble, bust! Munch or Lee, murmur, murmel, Alligator Pie, they lost my money in TTI?
It sounds much like a strange recital of, The Walras and the Schumpeter, in all respect
to both those great minds, and to Charles Dodgson’s Lewis Carroll and Alice.

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Running markets without walras and schumpeter

  1. 1. “Page 1 of 9 May2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited.The author does not provide investment advice. In order to use reproduce or convey the material herein,in any way, written agreement must be obtained from the author or its agent Architypes Inc.StockTakers Limited is an Alberta corporation providing information on “likeables” equities.StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.Running Markets without Walras and Schumpeter?“Chance, which is nothing but the want of art,” John Arbuthnot (1692)1,“Stock prices are like “bubbles” held aloft by operational profits, cash flow and debt service,earnings and distributions, and every so often that are engaged (liked) or disengaged (not liked) at theprice of risk.” - Goetze 2009“The only reason for making a forecast, is to reduce risk. But we already know that the only no riskinvesting, is at the stock price, SP>SF, the price of risk.” - Goetze 2009“Because we know where we are, we will also know when to buy, when to hold, when to take profits,and when to sell.” - Goetze 2009“The “gap” U=SP-SF>0 is an instance of “enduring price arbitrage” and does not depend on themore common and uninspired micro-arbitrage profits discovered over micro-seconds by overachievingcomputers.” - Goetze 2009“I never discourage anyone from buying a lottery ticket. I dont know the future. But, to win, he or sheneeds to buy all the tickets. And thats the price of risk (in a lottery).” - Goetze 2009Partitioning the DOW 2000 to 2009 – portfolio yielded compounded 29% IRRDoing the Dow is one thing weve talked about in some detail in recent editions of CassandraNews. Inthat rather simple portfolio (there are only thirty stocks, and seven of them are not even of investmentgrade for anyones portfolio) that we crafted in the DOW had an IRR (Internal Rate of Return) of 29%per year through the years 2000-2009.In that same period the DOW itself returned essentially, nothing. In fact the DOW lost 40% of themoney investors had placed there in their hope of enjoying earnings and capital security. Moreoverportfolio managers cannot tell us why, markets mumble and stumble! They condition us to buy shares,they do not make them, mumble, caveat emptor. Not then and still not now can the economists say,either, it seems! Classical, monetarists, medallists, Salty or Freshie, Bastian, Bayesian, Austrian,Keynesian, Modern or Texan all with their closed macro over micro models of nuanced terms inseparate languages, Babel, babble, bust! Munch or Lee, murmur, murmel, Alligator Pie, they lost mymoney in TTI? It sounds much like a strange recital of, The Walras and the Schumpeter, in all respectto both those great minds, and to Charles Dodgson’s Lewis Carroll and Alice, but mostly to her greatgranddaughters Katie and Dullah, his lessons are always such fun:Veblen was shining on the exchange board, shining with all his might:He did his very best but bid curves seemed smooth up and to the rightAnd this was not so odd, because it was middle of the tranche flight.The Walras was shining sulkily, because he thought the VeblenHad just no business to be there as this equilibrium gets done"Its very rude of him," he said, "To come and spoil my fun!"
  2. 2. “Page 2 of 9 May2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited.The author does not provide investment advice. In order to use reproduce or convey the material herein,in any way, written agreement must be obtained from the author or its agent Architypes Inc.StockTakers Limited is an Alberta corporation providing information on “likeables” equities.StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.Running Markets without Walras and Schumpeter?The pleas were yes as yes could be, their hands were dry as dry.You could not see a cloud, because no cloud dared in this skySo bids were flying overhead, here, where the bids do really fly.The Walras and the Schumpeter were walking close at hand;They wept like anything to see such quantities of demand"If these orders only cleared," they said, "it would be grand!""If seven maids from seven banks swept it up for half a year.Do you suppose," the Walrus said, "That they could get it clear?""I doubt it," said the Schumpeter, while shedding a bitterest tear."O Investors, come and walk with us!" the Walras did beseech."A pleasant walk, a pleasant talk, along this shiny prospectus reach:We can do with more than four, and still can give a hint to each."The Walras and the Schumpeter talked up a pile or so,And then they rested on a block priced conveniently low,As all the little Investors queued with their wallets in a row."The time has come," said Walras, "To talk of so many fine things:Of shoes-and ships-and sealing-wax- of cabbages- tranches and kingsWhy the market’s are boiling hot, and these tranches do have wings."Investors squealed, “We’ve no more cash without margin we will rue.”"After such kindness, that wouldn’t be such a dismal thing to do!""This short is so fine," the Walras said, "Do admire this rising view!”"It was so kind of you to come! And you are so very nice!"The Schumpeter said nothing but "Just another short entice,I wish you were not quite so deaf-- Ive had to ask you twice!""It seems a shame," the Walrus said, "To play them such a trick,After weve stretched them out so far, and made them run so quick!"The Schumpeter muttered, "Their cash is not spread too thick!""I’ll weep for you," the Walras said, "I’ll deeply sympathize."With sobs and tears he sorted, those wallets of the largest size,Holding his pocket-handkerchief before his streaming eyes."O Investors," said the Schumpeter, "we’ve had such a fine run!Shall we be trotting along again?” But answer came there none.But this was scarcely odd, because theyd gleaned every one.As Walras calmy strode along saying ‘Do come quickly, now, run.There’s some trashing of Veblen to be sure, as I hear Keynes has some
  3. 3. “Page 3 of 9 May2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited.The author does not provide investment advice. In order to use reproduce or convey the material herein,in any way, written agreement must be obtained from the author or its agent Architypes Inc.StockTakers Limited is an Alberta corporation providing information on “likeables” equities.StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.Running Markets without Walras and Schumpeter?Fine champagne, an excellent vintage, Eighteen Seventy Four- it will be such fun.”Further, while so many listened to the sales pitch going-on for “securing” their savings, in those nineyears, we made only thirteen (13) decisions running that simple portfolio in the DOW, thirteen (13)decisions to run the first and still open portfolio of five stocks (five buys and eight sells, to take orprotect profits), and fifty-six (56) decisions to run the now closed portfolio (twenty buys and thirty-sixsells) yielding the 29% IRR. We did this all, with abiding only one rule.The One Rule: Its in our portfolio(s) if, and only if, the stock price, SP>SF, the priceof risk, and otherwise it is not.It is not such a surprisingly effective rule, really. We found it is based in profoundly useful analysis of firms thatform equities which inhabit and hopefully trade for capital financing in our real markets. Some of those aremaking money, in a real and fundamental sense we have observed, and they tend to gain in stock price.Just, the One Rule: Its in our portfolio(s) if, and only if, the stock price, SP>SF, the priceof risk, and otherwise it is not.
  4. 4. “Page 4 of 9 May2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited.The author does not provide investment advice. In order to use reproduce or convey the material herein,in any way, written agreement must be obtained from the author or its agent Architypes Inc.StockTakers Limited is an Alberta corporation providing information on “likeables” equities.StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.Running Markets without Walras and Schumpeter?It is not such a surprisingly effective rule, really. The price of risk (SF) is an extension to the equity market(of cash and stocks) of the Tobin “Separation Theorem”2which deals with investments in cash andbonds. The price of risk is also “the least stock price at which a company is likeable”3and thats atheorem and the only thing that we know – or anybody knows – about stock prices is that the “price ofrisk”, defined in absentia4in the Capital Assets Pricing Model (CAPM) of Sharpe and Markowitz, is“the least stock price at which a company is likeable”.Moreover, the portfolio manager always has lots of time to consider these decisions. Companies thatare in the portfolio above the price of risk, are typically in the portfolio for a long period of time, suchas six months, fifteen months, two years, or more. Theres no reason that a portfolio manager shouldever be “surprised”5.No surprise, then, that whats true in the Dow, about stock prices and the price of risk, is also true in theNASDAQ 100. Its a theorem, after all, but one that is practical and has shown how it works.The DOW (2000-2009) - And Price of Risk Gives You Odds, 2.34:0.98 To Win.The NASDAQ 100 (2000-2009) - And Price of Risk6Gives You Odds, 2.57:1.03 To Win.
  5. 5. “Page 5 of 9 May2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited.The author does not provide investment advice. In order to use reproduce or convey the material herein,in any way, written agreement must be obtained from the author or its agent Architypes Inc.StockTakers Limited is an Alberta corporation providing information on “likeables” equities.StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.Running Markets without Walras and Schumpeter?Appendix: X-axis ScaleSince were having so much fun, the Price Change Volatility Range [-0.5,1.0] is on the y-axis, and, I can tellyou about the x-axis. The Range [-0.5,1.0] or Range [-1.0,0.5] for each Price Risk Region, SP>SF andSP<SF, respectively, is on the y-axis and simply represents the log-returns observed in each quarter, ineach Price Risk Region. The x-axis is scaled as -½ logab = -½ log(b)/log(a), where “b” is the logarithmof the product of all the positive returns (SP/SP1, SP>SP1) in any quarter (and the product is thereforegreater than one), and “a” is the logarithm of the product of all the negative returns (SP/SP1, SP<SP1)in the same quarter (and the product is therefore less than one). The “scale factor” (f=1/2, in thisexample), can be used to compress or expand the scale on the x-axis to provide a “spectral analysis” ofthe results, locating the “centre of mass” of the price changes, in terms of risk and uncertainty.Each company is coloured by a different “thread” that joins through (using a cubic spline) all the log-returns that we obtain for that company in each Price Risk Region and the x-axis scale tends to allocate“gainers” to the right, and “losers” to the left, using the distribution that is developed in the region, bythe data.
  6. 6. “Page 6 of 9 May2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited.The author does not provide investment advice. In order to use reproduce or convey the material herein,in any way, written agreement must be obtained from the author or its agent Architypes Inc.StockTakers Limited is an Alberta corporation providing information on “likeables” equities.StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.Running Markets without Walras and Schumpeter?We notice that there tend to be more gainers in the “high-priced” low risk tolerance region, the stockprice, SP>SF, the price of risk, and that “gainers” and “losers” are more or less equally distributed inthe “lowpriced” high risk tolerance region, SP<SF. There also tends to be more and better investmentopportunities in the “high-priced” low risk tolerance region, whereas the high risk tolerance regionappears a “traders delight” rife with sure profits only in micro-arbitrage, agency, and transaction costs.The NASDAQ 100 (2000-2009) The Spectrum of Risk and UncertaintyJust, the One Rule: Its in our portfolio(s) if, and only if, the stock price, SP>SF, the priceof risk, and otherwise it is not.
  7. 7. “Page 7 of 9 May2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited.The author does not provide investment advice. In order to use reproduce or convey the material herein,in any way, written agreement must be obtained from the author or its agent Architypes Inc.StockTakers Limited is an Alberta corporation providing information on “likeables” equities.StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.Running Markets without Walras and Schumpeter?Then, looking at the S&P 500 - (2000-2009) And Price of Risk Gives You Odds, 2.06:1.10 To Win.Always, just the One Rule: Its in our portfolio(s) if, and only if, the stock price, SP>SF, the priceof risk, and otherwise it is not.The models repeat with these results consistently appearing, always portfolios result with that sametendency demonstrating, the tendency for their achieving a ratio in the order of 2:1, gainers to losers.There is much more that can be said, but this result is profound and useful, and not consistent with thefoundations from which CAPM comes. Our theory makes a clear and accountable statement abouthuman behaviour that is at the root of firms’ social role, creating innovation and means for productivityand with that credit money and wealth, with no need of Walrasian or Shumpeterian equilibrium.
  8. 8. “Page 8 of 9 May2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited.The author does not provide investment advice. In order to use reproduce or convey the material herein,in any way, written agreement must be obtained from the author or its agent Architypes Inc.StockTakers Limited is an Alberta corporation providing information on “likeables” equities.StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.Running Markets without Walras and Schumpeter?The methods of CAPM aim themselves at seeming undifferentiated Bayesian domains, those fieldswith uncertainty in statements that can be made of them. According to the objectivist view, the rules ofBayesian statistics are justified and interpreted as an extension of logic. Its value can be seen inIBM’s“Watson.” By our taking out those firms with greater potential for gain, as we observe throughour theory, we create an effective sort of “Dutch Book” and take it out of the market into our portfolioas these “likeables” are differentiated from the rest. CAPM can usefully concern itself with the rest.Then, the S&P - TSX (2000-2009), And Price of Risk Gives You Odds, 2.04:1.01 To Win
  9. 9. “Page 9 of 9 May2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited.The author does not provide investment advice. In order to use reproduce or convey the material herein,in any way, written agreement must be obtained from the author or its agent Architypes Inc.StockTakers Limited is an Alberta corporation providing information on “likeables” equities.StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.Running Markets without Walras and Schumpeter?These results show the margin of risk for these partitioned markets portfolios is never less than 2:1 inany of the major North American markets that we have studied. These results have profoundimplications for mutual fund and pension fund managers.Implications for Mutual Fund and Pension Fund Managers.1. An investor, who knows the price of risk, can do it himself or herself, and understand his or herportfolio, and also yours.2. A portfolio manager, who doesnt know the price of risk, doesnt know anything about the stockprice. “Good intentions”, “market savvy”, and forty years of doing the same thing, count fornothing in these markets. One needs to know where we are.3. A “Growth Fund” buys and sells stocks that dont pay dividends. Thats all that one can say ifone doesnt know the price of risk. One cant even call it an “investment” and especially not, an“investment that favours capital growth by capital gains” if one does not know the price of risk.4. A mutual or pension fund that has stocks in both the low risk tolerance region, and the high risktolerance region, doesnt know what its doing if it doesnt know the price of risk. Ask yourbroker, whats the price of risk? And how is it dealt with?5. A fund cannot be said to “protect” or “preserve” capital, or to be “conservative”, if it does notknow the price of risk, and cannot calculate the downside exposure i.e. the “gap” U=SP-SF>0.6. An “Income Fund” buys and sells cash, bonds, and dividend paying stocks. It cannot be said toprotect or preserve capital unless the manager can state the downside risk of the capitalexposure, and has made a provision to protect it.- Ernst Goetze 2009.1The physical laws which govern the system are not known well enough to predict the outcome observed John Arbuthnot, Of the Laws ofChance, 1692,2James Tobin, Liquidity Preference as Behavior Towards Risk, Review of Economic Studies, 1958, and William F. Sharpe, Capital AssetPrices with and without negative holdings, The Nobel Foundation, 1990, and Harry M. Markowitz, Portfolio Selection, Journal ofFinance, 1952. This work is further informed by Verne H. Atrill, How All Economies Work, Principles and Applications of ObjectiveEconomics, 1979, and Ronald H. Coase, The Firm, the Market and the Law, U of Chicago Press, 1990, and James Tobin, Money andFinance in the Macro-Economic Process, The Nobel Foundation, 1981. This work is otherwise an original and unpublished work of theauthor.3E. Goetze, The Price of Risk and Enduring Price Arbitrage in the Capital Markets, 2009. Available from the author.4Its well-known that the “market price of risk” cannot be calculated within the equity markets only.5Bloomberg – August 6, 2009 - “I’m surprised they’d do it this early,” Brian McGill, senior analyst at Janney Montgomery Scott LLC inPhiladelphia, said of Hyatt’s timing. “While hotel stocks have performed well these last two or three weeks, investors will be sceptical ofthe industry’s fundamentals.”, or “It makes me angry, but it also throws up a lot of question marks,” said Ian Nakamoto, director ofresearch at MacDougall MacDougall & MacTier Inc., which manages about $3 billion, including Manulife and Sun Life. “This isdefinitely out of left field.” (regarding Manulife which cut its dividend by 50% even after promising that it wouldnt have to).6The Price Change Volatility Range[-0.5,1.0] is on the y-axis. The x-axis is scaled as -½ logab = -½ log(b)/log(a) where b is thelogarithm of the product of all the positive returns (SP/SP1, SP>SP1) in any quarter (and is therefore greater than one), and a is thelogarithm of the product of all the negative returns (SP/SP1, SP<SP1) in the same quarter (and is therefore less than one). The same scalecalculation is used in the Dow charts (with respect to those data).

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