May 2009 Archives

• Congratulations to Judge Sotomayor.  Everyone's talking about it.  I'm talking about it.   I'd like to see the Republican party spend what's left of their political capital on fighting this S. Court appointment.  (LA Times)  Psst. Obama.  Where's the Asian justice?

The Mathematics of Poker by Bill Chen is one of those rare view changing books.  Being a professional gambler requires a propensity for math, but not as much as the general public would think.  I'd posit that there's no real need for calculus or any complicated math.  More important is simple algebra, multiplying with percentages, and understanding basic probabilities.

Bayesian statistics goes a bit beyond basic probabilities, but it's pretty useful for games like poker.  I'm not very comfortable with getting into complicated symbolic notation, because (1) most people don't get it and (2) being able to break things down to its most understandable form is the best way of teaching.  Bayesian statistics is pretty much using observed information to try and get a more accurate picture of the probabilities.  The most cited example is the testing for a rare genetic disease.  If you test positive for the genetic disease, it's more likely that the positive test results are the result of testing error than having the disease.  At the same time, testing positive the first time around means you're more likely to actually have the disease than without the first test.

Bill Chen provides a very good example of bayesian statistics in poker.  When the table is broken up and you're sitting at a new table and see a guy with a big stack, either the player is very lucky or he's a loose aggressive player.  The very tell that he has a big stack means it's likely that the guy is a loose aggressive player.  The instant he makes a position play (an aggressive play), the probability of him of being a loose aggressive player jacks up instantaneously.

The big stack of chips is like testing positive for the genetic disease.  This new information allows you to get a better understanding of what this person is really like.

Now that the US market is settling comfortably into a statist torpor, it is time to call attention to the fact that America faces challenges of an entirely different kind than it ever has in the past. This generation of Americans simply doesn't know what's going to hit it.

Wealth comes from sweat and smarts. Here's a factoid for you: China has 60 million elementary and secondary school students studying piano or orchestral instruments and playing classical music. America has 30 million students, total. China has classical music students at twice the number of all American students waiting in the pipeline to join the job market. Add to these the smart Indian kids who will be graduating from India's technical institutes with the world's sharpest math skills, and it seems likely that during the next five or ten years, a good 75% of the best-qualified job market entrants will come from China and India.

I cite the classical music students in order to emphasize that we are not talking about robotic nerds who know how to crunch numbers but have no creative ability. A "Spengler" essay from last December provides some detail. Anyone who has not been hiring young Asians has no clue how cultured and curious they are. Their American counterparts have seen life as a perpetual spring break interrupted by brief episodes of work, and are simply in no shape to compete.

In past years, to be sure, the smartest Asians came to America. That's where the capital markets were. A rich Chinese wouldn't lend money to a poor Chinese, unless the poor Chinese first moved to America. Our financial system was the glory of the world. That was then. If you are a smart Chinese or Indian entrepreneur, are you likely to get richer by moving to the US or by staying at home? Emerging market equities are a far more interesting proposition than the US stock market under Emperor Obama I. Bonus restrictions? Compensation caps? They never heard of them in Mumbai or Shanghai.

America isn't getting the immigrants any more, that is, the top-of-the-line human capital. As China reorients its economy towards domestic spending, America won't get the capital, either. America isn't going to crash. Unless it changes course, it will slowly sink into the mud, like England did during the 20th century.

This is partially what I've been working on for the past two days..

I. Brief Overview

            About two hundred years ago, modern science of that time thought the instant we stopped breathing, we were dead.  The Society for Recovery of Drowned Persons helped to change that perception by spreading awareness of a crude form of cardiopulmonary resuscitation ("CPR")[i].  Modern science is well aware that just because someone stops breathing does not necessarily mean a person is dead. 

            Cryonics, the low temperature preservation of humans, operates on the principle that today's modern science is incorrect in its assumption of death.  For someone to be declared legally dead depends on the medical professional, but an often used guideline is the irreversible cessation of circulatory and respiratory functions[ii].  When someone is declared dead, their condition is considered irreversibly permanent.  Even though legally dead, most cells inside a person's body can still be alive immediately after being declared dead[iii].  It can take hours after being declared dead before all of the cells in a person's body truly die.  The cryonics industry operates on the assumption that if a body can be preserved immediately after it's legally declared dead, some day in the future, the person can be revived because future medical science will define death at a much later stage.  This is similar to today's modern definition of death being at a much later stage than two hundred years ago.  It's hoped that the medical technology of the future will advance to a stage where people can be revived from a cryogenically frozen state and can be cured from their original cause of death.  Patients who choose to have their body cryonically frozen are wagering that any remote possibility of being revived in the future outweighs the costs of being cryopreserved.

            The method currently used to preserve a body involves replacing the blood with a preservation solution and then the freezing the body and brain with liquid nitrogen[iv].  If frozen in this manner, the body and brain will suffer the least form of ice crystal damage and can be preserved for a long period. 

            The costs for cryonic preservation can be very expensive.  The Alcor foundation charges $80,000 to $150,000[v].  The Cryonics Institute charges $28,000 to $100,000[vi].  Because of the high costs, an insurance policy can be bought for the procedure at a cost of less than $100 a month.  Because of the remote possibility of being revived in the future, patients set up trust funds in jurisdictions without Rules Against Perpetuities[vii].  The funds are to be returned to an individual if they're revived.  Through the magic of compounding and assuming market returns will continue in the future, the revived individuals should have a small fortune waiting for them in the future.

            Currently, there are no methods of resuscitating and reviving cryonically preserved bodies.  There are no scientific procedures that can prove the success of cryonics.  Patients who choose to be cyropreserved are hopeful that future technologies to revive them might include computer mind uploading or tissue regeneration through molecular nanotechnology[viii]. 

The Rate Reminds Me of One of those Horror Movies...

Where a cop fires all six shots at an approaching monster. 

With no bullets left, he desperately Proceeds to throw his gun at the monster. The Fed has already spent all of its bullets and has now thrown their gun at the approaching Recession Monster". Today's rate cut is the absolute last resort in what rate cuts can do. 

Unfortunately, it doesn't seem like it will have much effect in stopping the Recession Monster. It's quickly growing into a full blown Depression Monster. In modern horror movies, this is when the authoritarian government officials decide to use their most powerful weapons like the A-bomb. 

The Fed will be using the most powerful weapon at their disposal, the printing press. If this monster does not die by itself, the government will start printing a massive amount of cash and inflation. Due to the elimination of the gold standard, the flow of the printing press is now decided by "rational" government officials instead of a set certainty. This desperate solution might work. It appears there's a deflationary spiral going on right now, and if the Fed pumps just the right amount of inflation through its press, it can potentially offset each other. 

That requires a lot of trust in our leaders. I like to believe that our leaders are much smarter now than they were during the last Depression. I'll give them the benefit of the doubt. Maybe the use of the A bomb will destroy the monster, without destroying our own cities. 80/20 that our officials wont fuck it up. 

Reflecting on the near implosion of the financial system last fall, Buffett said officials should be judged more leniently when facing "as close to a total meltdown as you can imagine." 

But he warned that efforts such as the Treasury's $700 billion Troubled Asset Relief Program and the $787 billion fiscal stimulus plan passed this year by Congress will have to be paid for, one way or another 

And with political leaders showing little inclination to raise taxes, one sure way to pay for excess spending is to inflate the value of the currency, Buffett said. The biggest losers in a surge of inflation, he added, would include holders of bonds and other fixed-income assets. 

"I haven't had my taxes raised," said Buffett, who has run Berkshire for more than four decades. "My guess is the ultimate price will be paid by a shrinkage of the value of the dollar."