Best hedge fund year ever award

goes to John Paulson:

By 2005, Mr. Paulson, known as J.P., worried that U.S. economic strength would flag. He began selling short the bonds of companies such as auto suppliers, that is, betting on them to fall in value. Instead, they kept rising, even bonds of companies in bankruptcy proceedings.

"This is crazy," Mr. Paulson recalls telling an analyst at his firm. He urged his traders to find a way to protect his investments and profit if problems developed in the overall economy. The question he posed to them: "Where is the bubble we can short?"

They found it in housing. Upbeat mortgage specialists kept repeating that home prices never fall on a national basis or that the Fed could save the market by slashing interest rates.

One Wall Street specialty during the boom was repackaging mortgage securities into instruments called collateralized debt obligations, or CDOs, then selling slices of these with varying levels of risk.

For buyers of the slices who wanted to insure against the debt going bad, Wall Street offered another instrument, called credit-default swaps.

Naturally, the riskier the debt that such a swap "insured," the more the swap would cost. And this price would go up if default risk appeared to be increasing. This meant an investor of a bearish bent could buy the swaps as a way to bet on bad news happening.

During the boom, however, many were so blind to housing risk that this "default insurance" was priced very cheaply. Analyzing reams of data late at night in his office, Mr. Paulson became convinced investors were far underestimating the risk in the mortgage market. In betting on it to crumble, "I've never been involved in a trade that had such unlimited upside with a very limited downside," he says.

Paulo Pelligrini, a portfolio manager at Paulson & Co., began to implement complex debt trades that would pay off if mortgages lost value. One trade was to short risky CDO slices.

Another was to buy the credit-default swaps that complacent investors seemed to be pricing too low.

"We've got to take as much advantage of this as we can," Mr. Paulson recalls telling a colleague around the middle of 2005, when optimism about the housing market was at its peak.

His bets at first were losers. But lenders were getting less and less rigorous about making sure borrowers could pay their mortgages. Mr. Paulson's research told him home prices were flattening. Suspecting that rating agencies were too generous in assessing complex securities built out of mortgages, he had his team begin tracking tens of thousands of mortgages. They concluded it was getting harder for lenders to collect.

Once-complacent investors now began to worry. The ABX, which had begun with a value of 100 in July 2006, fell into the 60s. The new Paulson funds rose more than 60% in February alone.

But as his gains piled up, Mr. Paulson fretted that his trades might yet go bad. Based on accounts of barroom talk and other chatter by a Bear Stearns trader, he became convinced that Bear Stearns and some other firms planned to try to prop the market for mortgage-backed securities by buying individual mortgages.

As Mr. Paulson's funds racked up huge gains, some of his investors began telling others about the funds' tactics. Mr. Paulson was furious, worried that others would steal his thunder. He began using technology that prevented clients from forwarding his emails.

In the fall, the ABX subprime-mortgage index crashed into the 20s. The funds' bet against it paid off richly.

Credit-default swaps that the funds owned soared, as investors' perception of risk neared panic levels and they clamored for this insurance.

And the debt slices the funds had bet would lose value, indeed fell -- to nearly worthless.

One concern was that even if Mr. Paulson bet right, he would find it hard to cash out his bets because many were in markets with limited trading. This hasn't been a problem, however, thanks to the wrong bet of some big banks and Wall Street firms. To hedge their holdings of mortgage securities, they've scrambled to buy debt protection, which sometimes means buying what Mr. Paulson already held.

The upshot: The older Paulson credit funds rose 590% last year and the newer one 350%.

Tyler Cowen thinks the GOP presidential contract is a little underpriced

He says:

I am still thinking that most people are underestimating the chances of a Republican President (the ascendancy of John McCain is starting to reverse this tendency), noting that #2 and #4 are working for my view, but #3 is working against it, at least at the moment.

2. Party disunity predicts an electoral loss

3. Signs that the election will center around the economy help the Democrats. Signs that the economy will focus on foreign policy help the Republicans.

4. When a woman or an African-American or a former first Lady is running for President, that is a huge issue in the minds of voters, whether anyone admits it or not

DISCLOSURE: I am long PRESIDENT.REP2008

The biggest front running trader ever?

Paul Kedrosky wonders if it's Al Greenspan.

Me, too.

UPDATE: Yves Smith, too.

Drive what I say, not what I drive

is what Huckabee, McCain, Obama, and Edwards share, according to Mark Perry:

Mike Huckabee: "When it comes to his own vehicles, the Baptist minister strays from his scripture of fuel efficiency." Vehicles includes a 2007 Chevy Tahoe (16 mgp, pictured above) and a Chevrolet Silverado (12 mpg) two of the biggest light trucks on the planet.

John McCain: Vehicles include a Lexus (his wife's) and a CTS Cadillac (18 mpg).

Barack Obama: Travels with a Secret Service convoy of Chevy Suburban SUVs (12 mpg). His personal vehicle was a gas-guzzling, 340 horsepower Chrysler 300C (17 mpg) until he was exposed, and he bought a more politically correct Ford Escape SUV hybrid (27 mpg).

John Edwards: Now drives an Escape hybrid (30 mpg) after he was inconveniently caught driving a bigger SUV last summer while preaching that Americans should sacrifice their SUVs.

Why, I was just saying the same thing on Sunday.

The 2008 Recession contract

is unusually active today:



DISCLOSURE: I am short US.RECESSION.08

We've reached the $100 billion mark

in bank writedowns. Capital infusions stand around $50 billion.

We could be in the 8th inning.

What is it with Pastors and Taxes?

Molly Ball scoops (via Mark Stricherz):

Obama had a full Sunday in Southern Nevada, first making a surprise appearance at a downtown black church, where he spoke at the end of the service.

Before he arrived, the pastor of the Pentecostal Temple Church of God in Christ, speaking from the pulpit, advocated for Obama, possibly breaking the law. Pastor Leon Smith told the congregation that "the more he (Obama) speaks, the more he wins my confidence, and ... if the polls were open today, I would cast my vote for this senator."

He urged them to do the same, saying, "If you can't support your own, you're never going to get anywhere. ... I want to see this man in office."

Under federal tax law, nonprofits such as churches are prohibited from endorsing or opposing political candidates. The Internal Revenue Service has ruled that the forbidden partisan activity includes speech from the pulpit that indicates the church favors a particular candidate.

The campaign said the pastor simply had made supportive statements about Obama's record. The church could not be reached late Sunday.

I recently posted about another pastor in conflict with taxes.

Veryan Allen writes about: Investing, Trading or Gambling

here:

What is the difference between investing, trading and gambling? The first two come down to a divide in the holding period continuum; microseconds to months is trading but years is investing. Superficially investing and gambling are quite similar; putting money at risk in the hope of making more money. But most investors would balk at the idea of being called a gambler.

Whenever I hear the argument for long term passive investing I wonder what temporal era is meant - geological or cosmological time? Over periods of relevance to living humans I'd rather invest in alpha than gamble on beta. Suppose in 2020 or 2030 major equity indices are LOWER than today? Lost year, lost decade? Gold may be above $900 today but remains far below its inflation-adjusted high set over 600 years ago. I'll take different strategies applied to assets over asset classes themselves every time.

Most investors cannot wait long enough for the beta bet to pay off and why should they when they can allocate to fund managers with the skill to generate reliable absolute returns from their edge? Investing and trading both have important roles to play in a portfolio but it is no place to gamble. The only trades to make and the only managers to pick are those with positive expectation and the odds in their favor.

Some of my earlier ruminations on the same here.

UPDATE: Felix Salmon has his take here. I agree with Allen that Blackjack and Poker biases against the individual player can be overcome, but agree with Salmon that Roulette and Dice cannot.

Poverty's negative correlation to Freedom

Mary Anastasia O'Grady reports:

The 2008 Index of Economic Freedom also reports that the freest 20% of the world's economies have twice the per capita income of those in the second quintile and five times that of the least-free 20%. In other words, freedom and prosperity are highly correlated.

The annual survey grades countries on a combination of factors including property rights protection, tax rates, government intervention in the economy, monetary, fiscal and trade policy, and business freedom.

Top 5		Bottom 5
1. Hong Kong		153. Burma
2. Singapore		154. Libya
3. Ireland		155. Zimbabwe
4. Australia		156. Cuba
5. United States		157. North Korea

Unrated: Congo Dem Rep, Iraq, Montenegro, Serbia, Sudan

NOTE: I think there's some long-term risk of Hong Kong reverting towards China (ranked near the top of the lowest quintile, at #126). And Bryan Caplan recently noted a notable exception to the freedom in Singapore:

Singapore has conscription. Two years of mandatory military service. Or as I see it, hell on earth. It's not just state slavery. It's state slavery in an especially unpleasant line of work. Even in peacetime, my best-case scenario for military service is that it's like full-time Physical Education.

I'm happy to waste 11% of GDP on unnecessary health care expenditures, and live with another percentage point or so of unemployment, to keep myself and my sons from involuntary military service. And frankly, the purported "social benefits" of the draft - greater social cohesion, egalitarian mingling, and the fostering of patriotism - horrify me as well. Hey, I never claimed to be normal.

Maybe one day a key member of the exceptionally economically literate elite of Singapore will re-read a standard textbook critique of conscription. Or maybe he'll come across David Henderson's great article on "The Role of Economists in Ending the Draft." And then he'll suddenly say: "What were we thinking? Conscription is really inefficient." It would be nice if he'd add, "Oh, and monstrous too," but I don't ask for miracles. Until that day comes, the policies of the U.S. remain the lesser evil.

UPDATE: Don Boudreaux has more:

But unleash people from the countless foolish and rent-seeking constraints imposed by government and from constraints imposed by their own superstitions and they will create resources. They will flourish and prosper, not only materially but also culturally and intellectually. A free people can and will build a dynamically prosperous society in even relatively barren and inhospitable places such as New England, Arizona, and Hong Kong. An unfree people will languish in poverty even in lush paradises such as much of Central and South America and in lands teeming with 'natural' resources such as Congo and Russia.

Why can't Huckabee interpret the Bible as well as Thompson can?

John Bentley reports (via Glenn Reynolds):

Mixing theology and social issues on the campaign trail is rare for Fred Thompson, but he discussed it today answering a question from a member of the audience.

A woman asked him if he would “as a Christian, as a conservative” continue President Bush’s programs to combat global AIDS.

“Christ didn’t tell us to go to the government and pass a bill to get some of these social problems dealt with. He told us to do it,” Thompson said.

“The government has its role, but we need to keep firmly in mind the role of the government, and the role of us as individuals and as Christians on the other.”

Huckabee, on the other hand, is a classic prooftexter, trying to fit the foot to the shoe.

Patriots press conference jocularity

on Saturday night:

Randy Moss: Do you think you're a handsome quarterback?

Tom Brady: That was the last question.

Those happy days of yore

(via WallStreetJackass)

The Michigan GOP Showdown: Intrade v. Zogby

Intrade		Zobgy		Candidate
54%		27%		McCain
44%		24%		Romney
		15%		Huckabee
		8%		Paul
0%		6%		Giuliani
0%		5%		Thompson
		<1%		Hunter
		7%		Someone else
		9%		Undecided
4%				FIELD

The Zogby data is here. The Intrade snapshot was taken at 3pm EST today.

According to Zogby, the epsilon is +/- 3.4%, so Zogby is showing a statistical dead heat. If McCain wins, then the contest will be called for Intrade. If either Romney, Huckabee, Paul, Giuliani or Thompson win, the contest will be called for Zogby. If any other candidate wins, a draw will be called.

Derek Lowe looks at the emotional limits of market driven pharma pricing

Very thoughtful essay; please read the whole thing:

Imagine that if you wanted to buy a car, you had to first visit a car consultant. This would be an expert who would place your order with a car dealer, after first looking over your transportation needs, financial status, and other factors. No one would be able to order a car on their own. Advertisements for cars would look similar to the ones we have today, except there would be a phrase at the end to “Ask your car consultant”. Much more advertising and promotion, though, would be directed at the consultants themselves, as you’d figure.

Let’s move the analogy over to something a bit more realistic: mortgages. Given the current subprime meltdown, it wouldn’t surprise me much if someone, somewhere, has called for the creation of a class of mortgage advisors. Anyone looking to borrow money for a real-estate transaction would be required to go through at least a cursory visit with one. And the bulk of the promotion money would, again, surely find it way to trying to influence the mortgage advisors themselves. Lenders would come in with figures showing how few people had defaulted with them, what percentage of the loans in a given market they underwrote, and so on. As gatekeepers in an important industry, they’d be much in demand.

Of course, in the world we live in, we trust adult consumers to be able to make decisions about which car to buy. And (for now, anyway) we trust adult consumers to be able to decide for themselves if they’re ready to buy a house, which houses they might be interested in purchasing, and how they might wish to do so. This is a harder decision, since it involves a much greater commitment of time and money than purchasing a car, and there are many more options available.

So we finally come to prescription drugs. Medical care is even more complicated than real estate – you can obtain licenses to sell properties or mortgages far more easily and with far less schooling than you need to obtain one to practice medicine, and that’s a good thing. You also cannot obtain new medicines, or any drugs for major diseases, without seeing a doctor first, both to make sure of the disease and to advise on its treatment. Consumers – and by this time, we use the word “patients” – are free to follow or not follow this advice, or to shop around until they find a doctor whose opinions they like better (if any), but they are not free to purchase and dose themselves (or others) with prescription drugs.

The difference is, as anyone will tell you, that health is an intensely personal category unto itself.

The unusual quality of a medical transaction is understandable for another reason as well, since traditionally the course of a physical ailment has been uncertain, and the ability of medicine to do anything about it has been likewise in doubt. For most of human history, seeing a doctor has been very much like seeing a priest. It has not been looked at as a business interaction, and in most cases it had no hope of ever being one in the usual sense.

People will spend terrifying amounts of their own money in the hopes of helping themselves or close family members, even in cases where the probability of success is tiny. Huge sums are spent in this country on people who are clearly near death. A person who would never dream of taking their savings to the racetrack and betting it all on a 50-to-1 longshot horse will take the same amount and put it down, with hardly a second thought, on a 500-to-1 chance of a successful medical treatment. This changed attitude extends further: medical personnel are often paid well for their efforts, but they can also give a great deal of themselves in the process, since lives are at stake. There’s an urgency, a justifiable sense of importance, which is hard for people in other professions to feel as often or as intensely.

Physicians deserve to be compensated for their work, proportional to its value and difficulty, and to their skills in performing it. And drug companies should be compensated for their efforts in discovering new drugs, also according to their value. Not even the harshest critic of the industry would balk at that last statement, but that because we haven’t come down to numbers yet. If you believe that virtually all the work of drug discovery is done through federal funding, with the drug industry stepping in at the end to decide on the price and the packaging, then you will feel that this compensation should be rather minimal. (If you think that, you’re mistaken, but that’s another topic).

How, then, to decide how much a given drug therapy is worth? Any economist will tell you that the price of some good is, finally, what people are willing to pay for it. This principle works silently, for the most part, until someone offers to resell tickets for the big game for five times what they paid for them, or when the price of lumber and gasoline goes up after a hurricane comes through.

My industry realizes this (any fool realizes this). But it’s never known quite what to do about it. Pointing out that drug discovery is expensive has been a traditional argument, and it’s one that I’ve made myself. But that doesn’t address the underlying reasons for the uneasiness. Paying money for health care does not descend to the same mental category as paying money for car repairs just because someone has tried to make a case for the accounting involved. People don’t believe the numbers, anyway, but even the most believable numbers in the world would not do the trick.

This is where I should come right out and say that I don’t have a solution to this problem. But I think that it’s worthwhile to consider why it exists, and where (to my mind) it’s coming from.

What ends recessions?

Asks and answers Tom Firey:

The definitive historical review of U.S. government responses to recession is Christina and David Romer’s 1994 NBER Macroeconomics Annual paper “What Ends Recessions?” [$]. The Romers examine each U.S. recession from the end of World War II to the article’s publication date (that is, the recessions of 1954, 1958, 1960, 1970, 1975, 1980, 1982, and 1991) and determine what government actions were taken in response and how successful those actions were.

Government response to recessions comes in three forms: monetary policy (the Federal Reserve’s Open Market Committee lowers interest rates to spur investment and borrowing), automatic fiscal policy (the automatic increase in government spending during recessions that results from increased unemployment insurance claims, welfare disbursements, etc.), and discretionary fiscal policy (the adoption of stimulus packages that contain increased government spending and/or tax cuts).

The track records for both FOMC action and the automatic stabilizers are strong, the Romers show. Both kick in quickly when recessions begin, and the economy turns around fairly soon afterward.

Stimulus packages have a much shoddier record, however: they take months to move through Congress, and additional months to implement — long after the recession has come and gone. Moreover, many of the specific actions initiated by stimulus packages are hardly stimulatory — extending unemployment benefits or launching major government construction programs requires several months to several years (and sometimes even decades) before the federal monies hit the economy.

DISCLOUSRE: I am short US.RECESSION.08

The funniest thing I read on Friday

just got truer, according to Jon Henke:

• "[R]ight now it looks as if the economy is stalling..." — Paul Krugman, September 2002


• "We have a sluggish economy, which is, for all practical purposes, in recession..." — Paul Krugman, May 2003


• "An oil-driven recession does not look at all far-fetched." — Paul Krugman, May 2004


• "[A] mild form of stagflation - rising inflation in an economy still well short of full employment - has already arrived." — Paul Krugman, April 2005


• "If housing prices actually started falling, we'd be looking at [an economy pushed] right back into recession. That's why it's so ominous to see signs that America's housing market ... is approaching the final, feverish stages of a speculative bubble." — Paul Krugman, May 2005


• "In fact, a growing number of economists are using the "R" word [i.e., "recession"] for 2006." - Paul Krugman, August 2005


• "But based on what we know now, there’s an economic slowdown coming." - Paul Krugman, August 2006


• "this kind of confusion about what’s going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession" - Paul Krugman, December 2006


• "Right now, statistical models ... give roughly even odds that we’re about to experience a formal recession. ... [T]he odds are very good — maybe 2 to 1 — that 2007 will be a very tough year." - Paul Krugman, December 2006

Eco-adopters have larger carbon footprints

according to The Telegraph (via Don Surber):

A survey of travel habits has revealed that the most environmentally conscious people are also the biggest polluters.

"Green" consumers have some of the biggest carbon footprints because they are still hooked on flying abroad or driving their cars while their adherence to the green cause is mostly limited to small gestures.

I'm not surprised, not one bit. No kayaking to Oslo or Bali, just a lot of celebs jetting around, huh? Or idling around in all those production trailers.

Bill Simmons and the Power of Four

He believes:

When you add a fifth person to a four-man studio show, and you're not getting rid of any of the other four people, by my calculations, that's too many people. Think of it as the power of four. Unless you're putting together a poker night or a group to play pickup hoops, in nearly every other conceivable scenario, you're better off with four people than five or more. Dinner always works better. Vegas works better. Cabs work better. Sporting events work better. Road trips work better. Local newscasts and morning shows work better. Rock bands work better. The most successful sitcom ever ("Seinfeld") centered around four friends, and the most popular female comedy series ("Sex and the City") did the same. If you keep the number at four, you'll always have enough people to make it interesting and everybody has a chance to shine.

Let's not forget those apocalyptic horses. I also agree with Bill that James "JB" Brown is the best NFL show host today.

Manufacturing employment under Governor Huckabee

This'll go over well on a national scale

from Club for Growth.

Singapore: liberty, Justice and JOBS for all

Bryan Caplan with a compelling Singaporean solution to rising unemployment:

With flexible wages, of course, it doesn't matter who legally pays the a tax. But the whole problem with recessions is that wages are somewhat sticky - you can have surplus labor for years before wages fall enough to restore full employment. By cutting employers' share of the tax, the Singaporeans greatly speed up the wage adjustment process.

A little more liberty would be nice?

UPDATE: More mind-blowing Singaporean solutions--this time on healthcare:

Singapore has achieved American health outcomes for about a quarter of the share of GDP the U.S. spends. Furthermore, if Canada shows that socialized medicine can save a few percent of GDP without hurting health, Singapore shows that the free lunch offered by greater government control is meager compared to the free lunch offered by old-fashioned individual incentives.

Affordable healthcare banned in Boston by Mayor Menino

reports Stephen Smith (via Glenn Reynolds):

Menino blasted state regulators for paving the way Wednesday for the in-store clinics, which are designed to provide treatment for sore throats, poison ivy, and other minor illnesses.

The decision by the state Public Health Council, "jeopardizes patient safety," Menino said in a written statement. "Limited service medical clinics run by merchants in for-profit corporations will seriously compromise quality of care and hygiene. Allowing retailers to make money off of sick people is wrong."

Yes, so the politician's answer boils down to: let's not let people decide how to spend their money by taking away their ability to choose between different service providers. And then I get the special interest donations while I'm campaigning, and a cushy job after I'm voted out.

Upticks in racism?

When Americans find out that Obama backs right wing corporate racist anti worker [manure], they will not vote for him--Rosanne Barr

You can’t shuck and jive at a press conference. All those moves you can make with the press don’t work when you’re in someone’s living room--Andrew Cuomo (via Don Surber)

The American Jewish Congress submitted this understated advertisement about the status of women in Israel to Ms. Magazine. Underneath the attractive photographs of Israel's foreign minister (Tzipi Livni), Supreme Court president (Dorit Beinish), and speaker of the Knesset (Dalia Itzik), the ad reads: "This is Israel." A Ms. Magazine representative, Susie Gilligan, whom the Ms. Magazine masthead lists under the publisher's office, told Ms. Kurlander that the magazine

"would love to have an ad from you on women's empowerment, or reproductive freedom, but not on this."

Ms. Gilligan failed to elaborate what "this" is. (via Glenn Reynolds)

Earlier racism print here.

The best song I heard today

DISCLOSURE: I am long NFL.PATRIOTS

Barry Ritholtz identifies imperfections in Intrade and its traders

Over at Midas Oracle, he writes:

Hence, we see more potential sources of market failure as these conditions are violated:
1) An insufficient amount of incentives;
2) A lack of diversity of ideas;

Chris Masse responds:

The rebuttal is easy:

1. Economists Justin Wolfers and Eric Ziztwewitz wrote that, even small, compared to the financial markets, many real-money prediction markets are liquid enough to generate statistically accurate probabilistic predictions.
2. Academic papers have shown that IEM’s predictions have been slightly better than the polls, even though their traders are unrepresentative of the general US population.

And my 2 cents in the comments:

.1. A dollar is a dollar, and the bragging rights that go with being right and winning are incentives beyond the dollar.

.2. Having a bunch of alleged right wing fanatics trading Obama v. Clinton seems irrelevant to their skewing of interparty contests.

I'd say Barry is 0-2 here. At least Intrade traders maintain a 2-0-2 advantage over Zogby in the 2008 primaries.

The funniest thing I read today

Paul Krugman is voting for doom. It's worth keeping in mind, however, that Paul Krugman has predicted eight of the last none recessions under the Bush administration.--Megan McArdle

DISCLOSURE: I am short US.RECESSION.08

Virginia Postrel shows Chris Masse and me how to disagree

with others without being disagreeable. She takes the following to task, yet remains ever sweet and seemly: Ron Paul, Reason Magazine, Andrew Sullivan AND Woodrow Wilson:

Rightly or wrongly, I didn't consider Paul "one of the biggest mainstream representatives of libertarian thought." I'm not sure whether I would have written about him if I had. Life is short, I don't make my living as a professional libertarian any more, and I don't feel responsible for commenting on every libertarian-related development that comes along. These days, I am more interested in understanding culture and economics than focusing on policy, much less policing the libertarian movement. Plus, as the Paulites will be quick to note, I disagree with Paul on his sexiest issue, the Iraq war (and on his second sexiest issue, opposition to immigration).

I do fault my friends at Reason, who are much cooler than I'll ever be and who, scornful of the earnestness that takes politics seriously, apparently didn't do their homework before embracing Paul as the latest indicator of libertarian cachet. For starters, they might have asked my old boss Bob Poole about Ron Paul; I remember a board member complaining about Paul's newsletters back in the early '90s. Besides, people as cosmopolitan as Nick Gillespie and Matt Welch should be able to detect something awry in Paul's populist appeals. (Note that by "cosmopolitan" I do not mean "Jewish." I mean cosmopolitan.) I suspect they did but decided it was more useful to spin things their way than to take Paul's record and ideas seriously. As for Andrew Sullivan, his political infatuations are not his strong point as a commentator.

Tim Cavanaugh has a smart take on the Paul controversy, made all the better by his swipe at Jim Crow-lover Woodrow Wilson. [Via Hit & Run.]

DISCLOSURE: I am short 2008.GOP.NOM.PAUL

Is Chris Masse much less predictive than prediction markets and the Bible?

I say Yes:

the wonderful-but-overexuberant Chris Masse wrote:

TRANSLATION: Hillary Clinton is finished. Done with.

This is the same Chris who, based on prediction markets, wrote in November that:

The next US president is Hillary Clinton. Period.

and Yes:

As far as the cultural costs to reading the Bible, how should we explain the positive correlation of Bible reading to wealth and rights? For instance, the Magna Carta, the Reformation, the Scottish Enlightenment, the American Revolution.

I’m not sure you can find any verses actually advocating any of the issues you mention, except for the use of alcohol. This appears to be irresponsible, illogical, unscientific, and undisciplined exegesis to me.

The readers and interpreters of the Bible get it wrong a lot of the time. But then again, not even prediction markets are perfect.

In a footnoted aside, Megan comes up with a great anecdote showing how a successful Robin Hood

can kill a local economy:

... a giant problem in America, particularly during depressions, when neighbors often showed up at foreclosure auctions, intimidated outside buyers to prevent them from bidding, and then bid trivial sums on all the property in order to return it to its former owners. This seems cute and folksy and community-oriented until you realize that this generally made the bank go out of business, or at least stop lending to that community, whereupon everyone complained that they couldn't get credit.

You had me at "niggardly"*

Megan McArdle on the political incorrectness of "skinny" lattes.

*My reference from 1999.

Goddard Institute for Space Studies have published their average 2007 mean surface temperature

as +0.56 Celsius degrees (over the mean 1951-80 mean of 14 Celsius degrees). The contracts closed on Dec 31 as follows:

STOCK	PRICE
From 0.51 to 0.60C	$48.72
From 0.61 to 0.70C	$43.03
0.50 or less	$4.31
0.71 or more	$3.93

Since 2001, the average temperature has registered as 0.544 Celsius degrees over mean, with a standard deviation of 0.048.

Thanks to all the traders who participated. The 2008 contracts are now available for your trading and interest.

Partisans and journalists not very predictive

from today's WSJ:

Three weeks before the 2006 elections, the British medical journal Lancet published a bombshell report estimating that casualties in Iraq had exceeded 650,000 since the U.S.-led invasion in March 2003. We know that number was wildly exaggerated. The news is that now we know why.

It turns out the Lancet study was funded by anti-Bush partisans and conducted by antiwar activists posing as objective researchers. It also turns out the timing was no accident. You can find the fascinating details in the current issue of National Journal magazine, thanks to reporters Neil Munro and Carl Cannon.

The Lancet death toll was more than 10 times what had been estimated by the U.S. and Iraqi governments, and even by human rights groups. Asked about the study on the day it was released, President Bush said, "I don't consider it a credible report." Neither did the Pentagon and top British authorities.

The high body count was an extrapolation based on a sampling of households and locations that was far too small to render reliable results. What the National Journal adds is that the Lancet study was funded by billionaire George Soros's Open Society Institute. Mr. Soros is a famous critic of the Iraq campaign and well-known partisan, having spent tens of millions trying to defeat Mr. Bush in 2004.

Two co-authors, Gilbert Burnham and Les Roberts of Johns Hopkins University, told the reporters that they opposed the war from the outset and sent their report to the Lancet on the condition that it be published before the election.

Then there is Lancet Editor Richard Horton, "who agreed to rush the study into print, with an expedited peer review process and without seeing the surveyors' original data," report Mr. Munro and Mr. Cannon. He has also made no secret of his politics. " See YouTube for more.

We also learn that the key person involved in collecting the Lancet data was Iraqi researcher Riyadh Lafta, who has failed to follow the customary scientific practice of making his data available for inspection by other researchers.

In other words, the Lancet study could hardly be more unreliable. Yet it was trumpeted by the political left because it fit a narrative that they wanted to believe. And it wasn't challenged by much of the press because it told them what they wanted to hear. The truth was irrelevant.

Hillary takes NH!

Intraders and Zogby respondents didn't come up with the right mix. Paul Tetlock did say: the more liquid the contract, the more the price overshoots.

Score Date State Party Intrade Zogby Winner 2-0-2 8-Jan NH Dem Obama Obama Clinton 2-0-1 8-Jan NH Rep McCain McCain McCain 2-0-0 3-Jan IA Dem Obama 3-way tie Obama 1-0-0 3-Jan IA Rep Huckabee 2-way tie Huckabee

Arnold Kling has a round up of scary things

that Ron Paul has said, or at least branded:

“[O]ur country is being destroyed by a group of actual and potential terrorists—and they can be identified by the color of their skin.”

“I think we can safely assume that 95% of the black males in that city [Washington, D.C.] are semi-criminal or entirely criminal.”

...“If this walking bomb had gone off, it would have demolished the House Chamber and most of the congressmen in it. Yet this attempted terrorist attack was buried by the media. Why? Because the perpetrator was an undoubtedly mad Israeli, furious over alleged slights to his country… [T]he Israeli lobby deep-sixed the story, and no one outside of Congress ever hea[r]d about it.”

No wonder he refuses to discredit the extreme groups supporting him.

UPDATE: Ann Althouse has been feeling queasy about Paul for awhile, and now she's especially nauseous.

DISCLOSURE: I am short 2008.GOP.NOM.PAUL

S&P 500 closes under 1400

Dow probably headed under 12500 as well.

As melacholic as it feels, I think that this has been a good move for denial dissapation. Maybe we're in the 7th inning stretch now.

Hollywood donor list to White House candidates

here (via Andrew Roth).

Adam Sandler has just increased in esteem. And this, after I already awarded him my "Best B-Movie" Producer and Actor awards.

Lileks writes about the contestants for the White House

here:

Fred Thompson has that Emperor Palpatine thing going on ... And I like that. Makes you want to say “yung SKYYY-wokkah,” does it?

Hillary – well, I feel sorry for her, in a way, because her time in the sun seems to have coincided with the exact moment the electorate decided it was tired of being ruled by Boomers.

Huckabee: he makes me recoil, instinctively. Some of this has to do with his positions, but it’s mostly the particular flavor of his religiosity and the thickness of its application to his campaign.

Mitt Romney? Super-brainy smart, a proven administrator, impeccably decent. He’s an admirable man in many ways. But my favorite finely-crafted piece of Stickley furniture is an admirable piece of wood in many ways, too. I cannot warm to Romney.

I like John McCain. He seems like the sort of guy you could have a beer with, right up to the moment where he smashes the bottle on the table and jams it in your face over something you said six years ago.

I like Rudy Guiliani, partly because his second-term sex scandal would involve someone closer to Teri Hatcher’s age than Jamie Lynn Spears. But mostly because he is smart, agrees with me on enough things, and does not appear to have a heart ruled by sentiment. I do not want a National Dad or even a Cool Brother (double-meaning unintended) for the President; I want someone with JFK’s optimism, Roosevelt’s steel, Truman’s irascibility, and so forth.

But it’s all for naught if the Obamaboom continues, because he has the zeitgeist at his back and a sail the size of an IMAX screen. People will vote for him because they want to be part of something larger, and that’s a rare and potent thing these days. Whether that’s a wise thing to do in perilous times depends on whether people think we’re living in perilous times, I suppose. We’ll see.

In the end, I think of the person I'd like to see behind the big desk the night the President addresses the nation after the nutwads pull off something big. It's certainly not Ron Paul. He'd probably bitch us out for starting it all by enraging the Barbary Pirates.

I agree with him a great deal, except I think Thompson should get higher regard, more like Yoda. Unfortunately, the electorate and the press responds to Fred the way Luke Skywalker and R2-D2 did in their initial encounter with the green puppet on Dagobah.

UPDATE: Vlad Putin really likes FDR's steel, too.

Bill Richardson looks like he's selling his futures contracts

on being Hillary's VP (via Glenn Reynolds).

Article on Google's internal prediction markets

here (via Chris Masse).

The New Hampshire Showdown: Intrade v. Zogby

In this case, Zogby polls and Intrade prediction markets agree, so the overall head-to-head record will be 2-0-2 (2 wins for Intrade and 2 ties).

Intrade	Zogby		Candidate
9%	29%		Clinton
91%	39%		Obama
1%	19%		Edwards
0%	6%		Richardson
	2%		Kucinich
	6%		Undecided
0%			FIELD
0%			Dodd
0%			Gore
82%	34%		McCain
16%	29%		Romney
2%	10%		Huckabee
0%	9%		Giuliani
0%	6%		Paul
0%	3%		Thompson
	1%		Hunter
	6%		Undecided
0%			FIELD
0%			Hagel
0%			Gingrich

The Zogby data is here. The Intrade snapshot was taken today at 1045 EST.

Recession sentiment increasing

DISCLOSURE: I'm short, and sold some more over the weekend.

My good friend Todd has had another problem with his trades on TS

He wrote them, stating:

TS -

Straight up - this is b!@#$%^&. No other way to put it.

You explain to me how this is an unrepresntative price?? The game is tied 2-2 at the 2nd Period intermission - The total is 5.5. I sold the over to someone at 38. Therefor more than 72% of the total has been achieved in 66% of the game. If ANYTHING the advantage was given to the person I sold the over to. In addition, as anyone who gambles knows, in 1 goal games - an empty net goal is a possibiliy of over 60% - giving a complete advantage to the person holding the over contract. Had ONE goal been scored in 19 minutes of action ( After having 4 in 40 Mins of action) - there would have been a 60% chance of an empty net goal in the FINAL 1 MINUTE of play.

The only person who gets screwed here is me. I GAVE AWAY advantage selling this line because I wanted action in the final game of the night. And now your pulling this b!@#$%^&?? I want a $152 trading credit - and there is no alternative resolution. You are STEALING money from me that I won fair and square. I risked $248 to win $152 on a contract that should have been 50/50. Do the math yourselves.

If an NBA team leads by 3 going to the 4th qrtr and is a 4 point favorite - ask your MMers what the price should be. 75. If an even money pre game line is tied at half time or at the end of the 3rd qrtr and it right on pace for hitting the line - line is 50. THIS GAME WAS AHEAD OF PACE FOR THE OVER AND I SOLD THE OVER TO SOMEONE AT PLUS VALUE!

You need to change your action on this event immediately. This is a fraud to help your market maker - as had it gone the other way - first off, I would have NEVER asked for an over turn - and secondly this conversation wouldnt even take place. I have never asked for a sports over turn on a misrepresentative price. Someones Ill sell a position at a disadvantage just to have action and have something to watch - JUST AS I DID last night...

And now what happens? You take the $$ from my account. Its fraud - its theft - call it what you want - but this is DEFINATELY NOT a misrepresentative price. And correct me if Im wrong but doesnt a misrepresented price need to be 20 points from actual??? So your saying actual value of this over was 17?? Ive talked to many high volume traders and the price range they give me is from 55-80 as Fair value.

This is straight up b!@#$%^&. Look at the facts. You STOLE money from me.

Todd

TS responded:

Hello Todd,

Further to our earlier email the following trades you made on last nights NHL games have now been reversed under Contract Rule 1.2:

NHL.CAL@SJS.OVER5.5 Sold 40 contracts at a price of 38.0 at: 05:32:27 AM GMT 01/04/08

We regret having to take this action but under Contract Rule 1.2 the Exchange reserves the right to reverse any trades that may have occurred at an unrepresentative price. Unfortunately pre-game orders failed to cancel and were later filled at unrepresentative prices.

Any trading fees charged for these trades will be refunded within the next 60 minutes.

If you have any questions or comments regarding this matter please reply to this email.


Kind regards,

Customer Services Team
Tradesports Exchange Operations

Sometimes trades are done at incorrect prices. But Todd's case seems sound to me. I understand that TS needs to protect the interests of the market makers, but it shouldn't be at the undisclosed or unfair expense to its other market participants.

I suggest that TS initiate a Self Regulating Organization to arbitrate these types of cases. Of course, funding this initiative would result in another fee for the traders to pay.

Todd is one of the prolific participants at TS. More posts involving him can be had here.

UPDATE: Todd's latest submssion:

I dont care about win or lose - $152 is meaningless to me.

So does this mean ifI accidently leave up an order pre game that is matched in game I can get my trades reversed?

Im not exactly sure what rational your company uses anymore. When I come onto live help to ask how to get a MMer to come back to a featured event - I am told "We have nothing to do with the market makers making markets". So shouldnt the same policy be in effect if a market maker leaves me hanging with a position I dont want because YOU advertise it as inrunning. So does that mean youll refund me? You are so one sided in these issues its disgusting.

I bought a position at a MORE than fair price. Cancelling my trade is stealing money from me.Ive lost before on markets that appeared to be left up - and those werent reversed. Tradesports owes me $152 and needs to clarify its rules so everyone understand the market maker protection.

And clarify this for me please. When I see a market posted at halftime in a game... how do I know if its from pregame or not?? I sold my lots to someone for a bargain price - and now you screw me.

There is no rational to your decisions, and I do not plan to let this one go.

You and the MMers are either partners or your not. If you protect them - hold them accountable. Dont just do it when its convenient for both of you.

$25,000 + in fees later - and Im still getting screwed.

Todd

Good discussion between Justin Wolfers and Bob Erikson

on the predictive quality of markets:

I [Justin] like Bob's paper a lot, and I'm glad you raised it, because I think it is a bit under-appreciated, and also a bit misunderstood. It turns out that Bob and I disagree a bit about the message from his paper (although after a few long chats, we don't disagree *that* much).

My [Justin's] thoughts:

1. Bob and Chris has four elections in their data, so it is hard to draw too much from it. That said, I draw two conclusions. First, markets beat an unconditional use of polls as forecasts. Second, correcting the polls, the two are pretty darn close. Based on a sample of four elections, I'm not sure I am willing to call one method or the other the winner.

2. My conclusion is that this actually tells us a lot of what prediction markets do: they digest and aggregate the polls, and create a pretty useful adjusted forecast. If I don't have the time to do the careful aggregation that Bob and Chris have, then I'm glad to have the market to do this for me. So I interpret their paper as telling me something about the mechanism by which prediction markets do well in forecasting elections. (This suggests an interesting puzzle: why did prediction markets do well in the pre-polling era?)

3. Your comment that polls are a snapshot, not a forecast, strikes me as a bit beside the point. Many people use polls as a forecast, and so it is reasonable to ask if they are a good forecast. (And pollsters sell them as forecasts, until you suggest they don't do well, and then they fall back on the "snapshot" argument.)

Read the whole thing.

Blogger Andrew Olmstead has been killed in Iraq

He left us a final post. Heartfelt thanks for your service, and sympathies to his loved ones. (via Virginia Postrel).

My trading pit colleague Beer4brkfst has started a Tradesports blog

He will be looking more at sports at Sports Betting Tips: Get the edge and win.

While I love the sports side of prediction markets, and think that trading sports derivatives helps folks cut their teeth on trading and managing risk in general, I tend to address more broader market themes on this blog and sports is often an afterthought. So I will be visiting him frequently, and wish him fat profits and readership.

(Weak) correlation between life expectancies and healthcare spending

From Yves Smith:

I don't think that U.S. life expectancies were adjusted for automobile fatalities, homicides, or immigration patterns. It seems like ignoring those realities would actually distort the measurement of healthcare spending on mortality.

An Iowa win for Huckabee ... is a national win for Giuliani?

I noticed that some took out my Giuliani offer @ 30 overnight

and got to thinking that Romney, McCain, and Thompson NOT WINNING helps Rudy--as I believe these three pose the biggest challenge to the former NYC mayor.

We'll know soon enough, as Giuliani must win Florida (Jan 29), followed by California, New Jersey and New York (Feb 5).

DISCLOSURE: I am long 2008.GOP.NOM.GIULIANI (and also long 2008.PRES.GIULIANI).

Andrew Leonard reflects on the emergence of Huckabee and the Religious Left

He says:

Maybe Iowan evangelicals were so blinded by the light shining from that cross that they couldn't see (or didn't care about) his heretical economic platform. Or maybe the opposite is true -- maybe the Republican punditocracy is so blind to growing economic angst and uncertainty in the United States that they simply can't comprehend that Huckabee's popularity might have something to do with the fact that he is the only Republican candidate (outside of, possibly, Ron Paul) who sincerely appears to care that some people are having a hard time right now.

If some portion of Huckabee's support does come from evangelicals who are comfortable with the thought that Jesus might care about the environment, poverty, and hunger, or that, as Huckabee said in August, "we can't ignore that there are kids every day in this country that literally don't have enough food and adequate drinking water in America," then Republicans are faced with a great paradox. The GOP long ago made its bed with Jesus Christ. But there's nothing in the Bible that equates belief in the savior with a belief in small government and tax cuts for the rich. By selling its soul to Christian conservatives, the GOP may have surrendered its own ability to define the conservative economic platform.

I know plenty of evangelicals here in the Northeast who prefer greater government coercion to salve their guilty consciences on the social ills they see. But Jesus never taught that loving one's neighbor meant increasing the government and the taxes paid. Rather, he taught that love requires direct aid, not government-intermediated programs.

And here are some other inferences that one might draw from Christ's teachings on taxes:

1. Tax collectors represent the bottom rung of morality.

2. Tax collectors are the sick people whom He came to heal.

3. Children of God should be exempt from taxes.

4. Fellowship should not be extended to tax collectors, who are on an equal level with pagans and the unrepentant.

Of course, Jesus did teach that citizens enjoying the benefits of government need pay their taxes. Ironically, the only group of people who were deemed worse than tax collectors were the legalistic and coercive religious leaders (apt description for Huckabee)?

All of the scripture links are to passages from the Gospel of Matthew, except for the Good Samaritan link, to Luke. Matthew was a tax collector who realized that there was a better way, and left government work to follow Jesus.

Today's 5.0% unemployment rate report

is a bit worrying. While a 5% unemployment rate is about right in a healthy and dynamic economy, a sustained 6% employment rate is recessionary, in my estimate.

In the last decade, unemployment briefly peaked over 6% in April-Oct, 2003. The record low rate of 3.8%, set back in April 2000, was part of this problem.

DISCLOSURE: I am still short a few of these, but not too many:

UPDATE: WSJ has a roundup.

2-0-0: Intrade markets predict Iowa winners better than Zogby polls

Wednesday night predictions on Thursday's caucuses in IA here.

The funniest thing I saw today

was the Gaussian Blur Mode (via Glenn Reynolds).

Damn Patriots

Karen Guregian with the scoop:

Belichick to be named Coach of the Year

(in a landslide).

UPDATE: FanHouse breaks it down:

The Herald contacted all 50 journalists and got responses from 41 of them. Of those 41, 25 said they were voting for New England Patriots head coach Bill Belichick, meaning that Belichick is the 2007 NFL Coach of the Year.

Paul Tetlock finds that more liquidity at Tradesports leads to greater inefficiencies

The abstract:

I show that the most liquid securities markets exhibit significant pricing anomalies, such as overpricing low probability events and underpricing high probability events, whereas less liquid markets do not exhibit these anomalies. I also find that the prices of illiquid securities converge more quickly toward their terminal cash flows. These results are consistent with the idea that liquidity is a proxy for non-informational or noise trading, which can impede market inefficiency; but they are inconsistent with models in which increases in liquidity have no impact or a favorable impact on efficiency.

His paper is here (via Justin Wolfers). This finding makes sense to me, given my differentiation between gamblers and traders, very early on in the life of this blog:

But there are more than gamblers and speculators at TS. There are traders. And what separates the traders from the gamblers is the driver to trade--namely, information (over impulse). Now there certainly is noise--in any market--as well as information, so that leads to negative expected profits. But there is also informational advantage. And data modeling.

It's not just meat heads betting sports non-informationally that tend to overshoot. I seem to have observed in equity analysts and debt rating agenices, too!

With increased awareness and acceptance of prediction markets, coupled with decreased transaction costs and regulatory barriers, more informational traders should come (and arb out the gamblers and speculators).

How does Congress correlate to the stock market?

Andrew Roth has the answer:

Mike Ferguson of the University of Cincinnati and Hugh Douglas Witte of the University of Missouri at Columbia, if you had invested $1 in the Dow Jones Industrial Average back in 1897 and held it only on the days when Congress was in session (and vice versa for when they are out of session), here are your returns through the year 2000:

In session: $2
Out session: $216

(via Glenn Reynolds)

Earliest N.E Patriots 16-0 prediction award goes to

Cris Carter. On tonight's new episode of Inside the NFL, they played the clip where Carter said "this team could go undefeated" BACK IN WEEK 2!

Carter did mentor Randy Moss, and knowing the inside stuff with him is probably what did it.

The Iowa Showdown: Zogby v. Intrade

Intrade	Zogby		Candidate
30%	28%		Clinton
54%	28%		Obama
16%	26%		Edwards
0%	7%		Richardson
0%	4%		Biden
0%	1%		Dodd
0%	1%		Kucinich
0%			FIELD
	5%		Undecided
53%	28%		Huckabee
43%	26%		Romney
1%	12%		McCain
0%	12%		Thompson
0%	7%		Giuliani
0%	9%		Paul
0%	1%		Hunter
3%			FIELD
	5%		Undecided

Zogby data is here. Intrade data taken at 930pm EST.

Tony Massarotti has a good point about Tom Brady's TD record

Manning plays in a dome, and Marino played in Miami.

Intrade breaks the first rule of derivatives

The first rule of derivatives is "A derivative contract has a clearly specified expiration". This allows a fair valuation of the contract, including probability and cost-of-carry calculations.

Now Chris Masse reports:

I have been inundated with complaints from InTrade traders, since Christmas. Here’s the problem. InTrade traders tell me that the expiration dates for the Bloomberg and Gore announcement contracts have been extended —at InTrade’s whim. The contract statements, I’m told, said they would expire on December 22, 2007. At this time, InTrade did not settle the bets and the expiry date was changed to read “November 2008″.

This is a good way to scare away liquidity, thereby weakening the exchange's predictiveness. Can someone at Intrade HQ say "strategy"? Anyone, anyone?

I'm not sure whether I should suspect incompetence or conflict of interest as the greater probable cause for this. Neither scenario breeds confidence.

Gold breaks nominal all time high

But it needs to more than double from here to exceed it's inflation adjusted high.