Monday, January 23, 2017

Q&A - 23/1

NYT

The first time the sugar industry felt compelled to “knock down reports that sugar is fattening,” as this newspaper put it, it was 1956. [..]  The industry responded with a national advertising campaign based on what it believed to be solid science. The ads explained that there was no such thing as a “fattening food”: “All foods supply calories and there is no difference between the calories that come from sugar or steak or grapefruit or ice cream.”

More than 60 years later, the sugar industry is still making the same argument, or at least paying researchers to do it for them. The stakes have changed, however, with a near tripling of the prevalence of obesity in the intervening decades and what the Centers for Disease Control and Prevention figures reveal to be an almost unimaginable 655 percent increase in the percentage of Americans with diabetes diagnoses. When it comes to weight gain, the sugar industry and purveyors of sugary beverages still insist, a calorie is a calorie, regardless of its source, so guidelines that single out sugar as a dietary evil are not evidence-based.

Damn

Good catch NYT. So there is heartbeat in that carcass after all.. :)

Juust kidding!

FT

“[Soros’s] connections, especially in the political realm, provided him with information that was not generally known” before he made a fortune by shorting sterling in 1992.

Incorrect

First, the Sterling bet was mostly Druckenmiller, and the basis of it all was watching "the macro", governments, central banks, so forth - see Mallaby's More Money Than God.

There is one instance  where Soros heard the German central banker Schlesinger at a central bankers’ gathering in Basel where he "declared publicly that he could make no guarantees about the future course of interest rates", Soros approaches him to double-check if he meant what he said, and he did. That comment indicated to him the Italian lira would be weak, so Soros and Druckenmiller add the lira to the basket of currencies to be shorted. But this is all connecting the dots.. noone comes to Soros and whispers in his ear "buy this at this time, sell this other thing". He used information available to everyone.

Question

Why are there so many people in finance?

Okay..

So what have we learned so far? Traders are speculators (even Warren Buffett is one), the markets will not work without speculators, and traders are not gamblers.

But not all participants in the markets are traders.

Let's take this case: Consider Company Z on March 1, 2009, which due to unforeseen circumstances must now find $10 million for an expenditure that will occur on June 1, 2009. It expects to generate revenue over time, so expects to be able to repay this amount on September 1, 2009. They can normally borrow funds for 3 months from its local bank at a rate of 3 month Libor plus 100 basis points. But then the effective interest rate would remain unknown until June 1. What does the company do? Company Z can  sell 10 Eurodollar future contracts (for total notional principal of $10 million) that expire on June 1, 2009.

Get all of that? So by short-selling futures on Eurodollars, company guarantees the rate it will get in the future is the same as today. Shorting ED is in a way speculating on the interest rate (LIBOR). If the rate went up in 3 months, Z would have "made" money (ED "price" is calculated 100-rate, 93 means %7), but it would be borrowing for its expenditure at that LIBOR, any gains offset the higher rate on June, so Z is back to March 1 - exactly what they were aiming for.

In this case the company, or its CFO did not enter the market to make (or lose) money. They simply wanted to put a certain number in their books for a future expenditure. Something they could know from today.

The needs of such people, that CFO are not nothing. A huge portion of finance is there to serve them, so the CFO can sit in front of his CEO and say "yes Mr./Mrs. CEO, that expenditure is planned for, and ___ is the rate we will be borrowing at".

He can't just say "pfff.. hey man, who knows whatz the rate gonna be.. but don't you worrry about a thaaang, it'll all be fine". If he said that, the CEO wouldn't simply fire that CFO, he'd probably throw him out the window. Businesses try to base themselves on predictability as much as possible.

Note: Eurodollar futures are based on a $1 million face-value, 3-month maturity Eurodollar time deposit. Eurodollars are time deposits denominated in U.S. dollars and held at banks outside the United States. A time deposit is simply an interest-yielding bank deposit with a specified date of maturity.  At the end of November 2016 total ED contracts outstanding stood at $12.84 trillion.

FT

“My stomach is killing me,” I complained. The pain was a mild burning that came and went when I moved, and the area felt tender when pressed. [..] “Well, the good news is your symptoms don’t seem worrying on a medical level and can be managed at home. This sounds like dyspepsia to me. Dyspepsia is doctor-speak for indigestion,” came the response. “You should try to avoid irritants such as spicy foods, black coffee/tea or anti-inflammatories. If the problem does not settle or becomes recurrent, talk to a GP.”

The diagnosis, unremarkable though it seems, did not come from any human medical professional — it was delivered to me on my smartphone by Babylon, an artificially intelligent medical adviser with whom I had been exchanging messages via an app.

Exciting new developments

AI should be able to replace most doctor visits in the near future.

FT

“The speed at which AI is improving is beyond even the most optimistic people,” said Kai-fu Lee, a venture capitalist with Sinovation Partners and a former Google and Microsoft executive in China. “Pretty much anything that requires 10 seconds of thinking or less can soon be done by AI or other algorithms.”

That is making the debate about how to handle the huge profits generated by the elimination of millions of jobs more urgent as well.

“Is the surplus that is going to be created because of breakthroughs in AI . . . only going to the few or is it going to be more inclusive growth? That is a very pressing challenge,” said Mr Nadella. “Clearly the thing that is top of mind for all of us given the political cycle, is if surplus is going to get created [by AI], I think we’ve got to talk about how the surplus is distributed.” Just as the last industrial revolution led to the emergence of the labour movement and the welfare state, “we need to think about what are the equivalents of that”, he said.

Exactly

Researcher

[geek] It was discouraging throughout the 1970’s that the work done on [automatic differentation, a technique whereby one can compute the derivative of any mathematical software function, programmatically ...] were ignored and even disparaged. Presentations at conferences were met with disinterest or disbelief. One reason advanced for this was the wide-spread conviction that if a function was represented by a formula, then a formula for its derivative was necessary before its derivative could be evaluated. Furthermore, the differentiation of a function defined only by an algorithm and not by a formula seemed beyond comprehension. A few simple examples could be incorporated into elementary calculus courses to combat these fallacies [..] An informal survey of numerical analysis and other textbooks reveals that most recommend against the use of derivatives, in particular regarding Newton’s method and Taylor series solution of differential equations. The reason advanced is the complexity of obtaining the “required” formulas for derivatives and Taylor coefficients by hand.[/geek]

Yes

Computers changed everything. The curriculum needs to be updated to reflect that. Also see this. Deep Learning makes heavy use of AD.

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