Capitalogix

Do You Agree to These Terms?

One of the biggest lies on the internet (and there are too many lies to count) is "I have read and agree to the terms of service(ToS)."

There is a plug-in that might help.

Terms of Service Didn't Read has summaries of most ToS, ratings for their user-friendliness and a browser plug-in so when you're about to sign one you can make sure it's safe. 

via TOSDR

Unfortunately, many of the ToS tell you that they're going to use your data, sell it to spammers, etc. For example, I talked about how a shadowy Russian company was behind FaceApp and owned the rights to photos you uploaded. 

Luckily, not every clause in a ToS is legal, and won't necessarily hold up in court - but that doesn't mean you shouldn't be protecting yourself. 

So, check out TOSDR, it's not perfect ... but it's probably better than nothing.

AI & Intellectual Property With Rich Goldstein

It has been a crazy ride.

I studied psychology and philosophy at Duke in the early '80s.  Then I got both an MBA and a law degree at Northwestern University in Chicago. 

My first job out of school was doing corporate and securities work at a law firm in Dallas.  By the early '90s, I knew that I was an entrepreneur. 

Regardless, the path seemed random as I was going down it ... but looking back, it all seems to make some form of sense. 

I recently did a podcast with a patent lawyer friend, Rich Goldstein. We talk about that, what it's like working with my son, the difference between practicing law and creating AI, innovation, and the role of Intellectual Property and its protection. 

I think it's a good listen. Check it out. 

 

The State of Democracy

I feel very lucky to live in America and lucky to live in a democracy ... but democracy is a term that encompasses a wide spectrum of activity and governments. In the same way that Republics and Capitalism also represent a wide spectrum of activity.

America has adopted a form of all three of those underlying structures, but it changes with each regime change, and as we adapt to the complexities of modern-day civilization.  

It's worth understanding the nuances of what brand of democracy you live in - and what would make it ideal (in your opinion).

That's a much too complicated question to answer in the scope of this article, but a great starting point is understanding the world spectrum of Authoritarian -> Full Democracy, and how the different countries score. 

Luckily, visualcapitalist put together a great interactive graphic based on the Democracy Index global ranking (as of 2019). Click the image to see the interactive version.

via visualcapitalist

Before I get into the rankings, a quick look at the classifications within the Democracy Index. It bases the score on 60 questions that cover things like the electoral process, civil liberties, government functions, and political culture. 

• Authoritarian Regime: 0.0 - 3.99
• Hybrid Regime: 4.0-5.99
• Flawed Democracy: 6.0-7.99
• Full Democracy: 8.0 - 10.0

Topping the list is Norway, and the most Authoritarian regime is North Korea.

Unfortunately, based on this metric, the U.S. (which is one of the oldest democracies in the world) was downgraded to a flawed democracy as of 2016, after teetering for many years. Some stated reasons for this shift are the growing distrust in public institutions, an upshot in ideological purity, and less bipartisan efforts. 

 Since 2006, when the Index was created, Democracy has actually been decreasing globally. Today, around half of the world's population lives in a democracy of some sort, with only 5.7% living in a "full democracy". 

Here Are Some Links For Your Weekly Reading - September 12th, 2020

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• Facebook Robots Shut down after They Talk to Each Other in Language Only They Understand. (Independent)
• Finding Beauty in the Imperfection. (Entrepreneur)
• Colors Evoke Similar Feelings around the World. (NeuroScienceNews)
• Alicia Keys: NPR Music Tiny Desk Concert. (YouTube)
• How Conspiracy Theories are Shaping the 2020 Election and Shaking the Foundation of American Democracy. (Time)

 

Trading Links:

• Trillions What is a Trillion Dollars?(InformationIsBeautiful)
• NYSE Signals It Will Exit New Jersey If State Taxes Stock Trades. (Wall Street Journal)
• There are Now 17,000 Bitcoin Millionaires. (Decrypt)
• Are You an Investor or a Gambler? the Stock Market Knows. (Wall Street Journal)
• JPMorgan Creates New Team to Trade Shares of Pre-IPO Giants Including SpaceX, Robinhood, and Airbnb. (CNBC)

Innovator Mindsets

To some, new technology is a good thing.  To others, less is more.

Most people simply "tolerate" technology transitions, some people drive them, and others crave them and use them as a catalyst for growth or strategic advantage.

In the image, above, the blue line represents consumer adoption (taken from Geoffrey Moore's "Crossing the Chasm", while the yellow line represents market share. 

As you can see, only 2.5% of the population drive innovation (or adopt it early enough to help drive the Alpha & Beta versions of emerging technologies). 13.5% make up the Early adopters, who help get it ready for the mainstream.  Then the early and late majorities are the groups that ultimately consume (or use) the mature product. Meanwhile, Laggards are often forced kicking and screaming into “new” technologies as the early adopters are well on their way to subsequent iterations. 

Even if you are not an innovator, here are a few Innovator Mindsets that I find useful. 

1. You Believe There’s A Better Way
   • Wherever you are, you know that there is a best next step and you are eager to find it and take it.
   • You recognize that the opportunity for more (or better) often lies just beyond the constraints or problems of the current way.
   • The bigger future fuels your efforts. When initial excitement fades, understanding what the bigger future can bring helps you power through.
2. You Are Comfortable Being Uncomfortable
   • You understand that Pioneers sometimes take arrows in the back.
   • When creating a new reality, you expect some resistance as a result of the law of averages. Escaping the status quo takes a lot of momentum, but it’s worth it. 
   • You recognize when victory is near.  In a quirk of human nature, too many people quit just before they would have won. Don’t make that mistake.
3. You Know Where You're Going, Even If You Are Not Sure How You're Going To Get There
   • Your goal should be your North Star. A clear direction is important to ensure that activity leads to progress.
   • Measure progress and momentum rather than the distance from your goal.
   • It is easier to course-correct while in motion.
   • If you’re too committed to a path that isn’t leading in the right direction, you might find what Blockbuster, RadioShack, and Kodak found.
4. You Are Married To Questions (Not Necessarily Answers)
   • Everything works until it doesn’t; and nothing works forever.
   • It’s easy to find an answer and think it’s the right one, but there’s always a best next step or a better way.
   • Figure out what you want and how to get it. This is much more empowering than focusing on what you don’t want or why you can’t get it.
   • Ask questions that focus on opportunities or possibilities rather than challenges or what you want to avoid.
   • Energy flows where focus goes.
   • Commit to finding a way!

I plan on sharing more Innovator Mindsets.  Let me know what you think.

Feast on This: The Big Mac Index

In the past, I've shared various "indicators" for markets that just don't make sense — like the Superbowl Indicator. The lesson to learn from those indicators is that we crave order, and look for signs that make markets seem a little bit more predictable even where there are none. 

Wall Street is, unfortunately, inundated with theories that attempt to predict the performance of the stock market and the economy. More people than you would hope, or guess,  attempt to forecast the market based on gut, ancient wisdom, and prayers.

While hope and prayer are good things ... they aren’t good trading strategies.

Today, I want to talk about a still "out there" index, but one that's a bit more practical from an economics standpoint (remember economics ≠ markets). I don't believe it should influence trading decisions, but I do believe it can teach you something about the practical realities of economies. 

The Economist's Big Mac index seeks to make exchange-rate theory more digestible.  They say it is arguably the world's most accurate financial indicator (based on a fast-food item).

The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger … a McDonald’s Big Mac. The difference the disparity in price between Big Macs, and the actual exchange rate lets you know whether the currency is over or undervalued. 

According to this measure (as of July 15th, 2020), the most overvalued currency is the Swiss Franc at 20.9% above it's PPP rate. In Switzerland a Big Mac costs 6.50 francs. In the U.S. a Big Mac costs $5.71. The implied exchange rate is 1.14, and the actual exchange rate is 0.94 — thus 20.9% overvalued. For contrast, South Africa Rands are the most undervalued (67%) with a Big Mac costing 31 rand and an actual exchange rate of 16.67. 

Click the image below to see the interactive graphic.

via The Economist

The index is supposed to be a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements ­such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.

It is not meant to be the most precise gauge, but it works as a global standard because Big Macs are global and it's lighthearted enough to be a good introduction for college students learning more about economics. 

You can read more about the Big Mac index here or read the methodology behind the index here.

Gartner's 2020 Hype Cycle For Emerging Technologies

Each year, I share an article about Gartner's Hype Cycle for Emerging Technologies. It's one of the few reports that I make sure to track every year. It does a good job of explaining what technologies are reaching maturity, but which technologies are being supported by the cultural zeitgeist. 

Technology has become cultural. It influences almost every aspect of every-day life, and it's also a massive differentiator in today's competitive landscape. 

Sorting through which technologies are making real waves (and will impact the world) and which technologies are a flash in the pan, can be a monumental task. Gartner's report is a great benchmark to compare reality against. 

2019's trends lead nicely into 2020's trends. While there have been a lot of innovations, the industry movers have stayed the same - advanced AI and analytics, post-classical computing and communication, and the increasing ubiquity of technology (sensors, augmentation, IoT, etc.). 

What's a "Hype Cycle"?

As technology advances, it is human nature to get excited about the possibilities and to get disappointed when those expectations aren't met. 

At its core, the Hype Cycle tells us where in the product's timeline we are, and how long it will take the technology to hit maturity. It attempts to tell us which technologies will survive the hype and have the potential to become a part of our daily life. 

Gartner's Hype Cycle Report is a considered analysis of market excitement, maturity, and the benefit of various technologies.  It aggregates data and distills more than 2,000 technologies into a succinct and contextually understandable snapshot of where various emerging technologies sit in their hype cycle.

Here are the five regions of Gartner's Hype Cycle framework:

1. Innovation Trigger (potential technology breakthrough kicks off),
2. Peak of Inflated Expectations (Success stories through early publicity),
3. Trough of Disillusionment (waning interest),
4. Slope of Enlightenment (2nd & 3rd generation products appear), and
5. Plateau of Productivity (Mainstream adoption starts). 

Understanding this hype cycle framework enables you to ask important questions like "How will these technologies impact my business?" and  "Which technologies can I trust to stay relevant in 5 years?"

That being said - it's worth acknowledging that the hype cycle can't predict which technologies will survive the trough of disillusionment and which ones will fade into obscurity. 

What's exciting this year?

Before I focus on this year, it's important to remember that last year Gartner shifted towards introducing new technologies at the expense of technologies that would normally persist through multiple iterations of the cycle. This points toward more innovation and more technologies being introduced than in the genesis of this report. Many of the technologies from last year (like Augmented Intelligence, 5G, biochips, the decentralized web, etc.) are represented within newer modalities. 

It's also worth noting the impact of the pandemic on the prevalent technologies. 

For comparison, here's my article from last year, and here's my article from 2015. Click on the chart below to see a larger version of this year's Hype Cycle.

via Gartner

This year's ~30 key technologies were selected from over 2000 technologies and bucketed into 5 major trends:

• Composite Architectures represent the organizational shift to agile and responsive architectures due to decentralization and increased volatility. Emphasis is on modularity, continuous improvement, and adaptive innovation to respond to changing market conditions (like in trading, or in businesses rapidly shifting to remote). Sample technologies include embedded AI and private 5G
• Algorithmic Trust is a direct result of increasing data exposure, fake news, and biased algorithms. As a result, technologies have been built to "ensure" identities, privacy, and security. A great example is more technologies being created on the blockchain. Other examples include explainable AI and authenticated provenance
• Beyond Silicon is in its infancy, but represents the limitations of Moore's law and the physical of silicon. This has led to new advanced materials with enhanced capabilities being used, and other simple materials being used. Examples of this technology can be seen in  DNA computing and storage, quantum computing, and biodegradable sensors. 
• Formative AI is the shift towards more responsive AI; models that adapt over time and models that can create novel solutions to solve specific problems. Sample technologies include generative AI, self-supervising learning, and composite AI. 
• Digital me represents the integration of technology with people, both in reality and virtual reality. Past hype cycles have introduced implants and wearables, but the potential applications of the technology are growing, especially in response to social distancing.  Examples are health passports, Two-way BMI, and social distancing technologies. 

I'm always most interested in the intersection of AI and advanced analytics. This year, it looks like many of the fledgling AI technologies have become integrated and more advanced. Much like the formative years for children, formative AI represents a new era in AI maturity. Models are becoming more generalized, and able to attack more problems. They're becoming integrated with human behavior (and even with humans as seen in digital me). 

As we reach new echelons of AI, it's actually more likely that you'll see over-hype and short-term failures. As you reach for new heights, you often miss a rung on the ladder... but it doesn't mean you stop climbing. More importantly, it doesn't mean failure or even a lack of progress.  Challenges and practical realities act as force functions that forge better, stronger, more resilient, and adaptable solutions that do what you wanted (or something better).  It just takes longer than you initially wanted or hoped.

To paraphrase a quote I have up on the wall in my office from Rudiger Dornbusch ... Things often take longer to happen than you think they will, and then they happen faster than you thought they could. 

Many of these technologies have been hyped for years - but the hype cycle is different than the adoption cycle. We often overestimate a year and underestimate 10. 

Which technologies do you think will survive the hype?

Data Really Is Beautiful

I think most data scientists or traders would agree that some charts are just prettier than others.

Whether it's due to the artistry of the creator, the results shown, or an insight or perspective illuminated ... I am sometimes surprised by the beauty of a chart. 

After looking at thousands of charts, some really do look "pretty" and others look "ugly" to the trader.  Perhaps this stems from an intuition honed through many trials of separating luck from skill?

Taking a different approach is Stoxart, created by a visual designer at Nike named Gladys Orteza.  She has been turning stock charts into landscape artworks related to the company they reference.  All that's missing is the warning that past performance doesn't guarantee future results.

Here is an example of her art inspired by Ford's performance in the last year.  Maybe she should have titled it "Sunset".

via LLMoonJ

 Another fun one is a year of Tesla performance. 

via LLMoonJ

Here's a link to see more Stoxart. 

My Talk With The Sustainable Family Wealth Summit

I recently had the chance to speak at a wealth summit helping to educate family offices on the different opportunities available to them. Because of my work around the hedge fund space - and with emerging technologies like AI - I was brought in to focus on both topics for their audience.

The financial industry is intimidating - especially to newcomers - and while this summit is targeted towards family offices with $5MM+ in liquid assets, the lessons are accessible to any level of wealth. 

The presentation was somewhat of a departure from my normal talking points because it was more focused on the basics of hedge funds & trading in general.  Nonetheless, I think it's worth watching.  This clip shows my response to the moderator's previous presentation.  The presentation provides an introduction to hedge funds and alpha generation now and into the future.  We also talk about Madoff, performance fees, the 2008 crash, "why a hedge fund?" and a lot more. 

 

 

Hope that helped.  Let me know what you think.

 

The Disconnect Between the Stock Market and Consumers

The recent shutdown has brought light to the disparity between markets and economics, and also served to widen the relationship. 

In high school, most of us were taught basic supply and demand. Some probably took a macroeconomics course, fewer got an MBA, and I know some of you reading this are actual economists or traders. 

Yet, most people (even some economists) misunderstand what drives financial markets. 

In theory, share price is supposed to be the net present value of the future earnings stream.  This is a "weighing" mechanism that also balances positives and negatives, short-term and long-term issues, industry cycles, fundamental data, and a host of other issues.

The markets represented the collective fear and greed of a population.  A trader doesn't need to guess what someone specific is going to do ... their calculus is more about the law of large numbers.  How will most people respond to a sudden move up or a sudden move down?  Will they see it as a danger or an opportunity?

In a sense, markets operate like an actuary for an insurance company.  Actuaries don't need to know when you will die, specifically, but rather if they insure 10,000 people like you, how many are likely to die this year (and what premium can they charge to cover the death benefits to be paid, the cost of operations, plus their intended profit margin.

In the basics of economics, markets and their consumers play a sort of tug-of-war until an equilibrium is set. Price represents the amount of money a consumer is willing to pay for this good (or a comparable good) and the amount of money a seller is willing to sell it for taking into account overhead, manufacturing, time-value, etc. 

It's not necessarily the maximum cost a consumer would pay and minimum a seller would sell, but for the sake of this discussion, that nuance isn't overly important. 

The markets were an important price discovery tool using "open outcry" as a way to see at what price others were willing to buy or sell.

As markets got faster and transactions stopped being generated solely by people trading with people, the pricing mechanism changed.  I think of it as a fair value range surrounded by a fair speculation buffer.  As markets get faster, noisier, and more volatile, the fair speculation range expands.  That means pricing is more dynamic and edges decay faster than ever.

This also means that less of the price is based on simple things, like whether the economy is improving or declining.  As we've seen, markets can soar even when economies face serious existential threats.

Market structure, today, involves many more players investing for many different reasons. Gone are the days when the market waited with bated breath for Fed conferences, earnings reports, and presidential updates. Instead, you have speculators, passive investors, fundamental investors, quantitative investors, companies trying to hedge bets, market makers, manipulative algorithms, governments, and more ... all involved in trench warfare seeking an edge. 

They trade for different reasons – some may make sense logically to you, others are executing part of a strategy you may never figure out. But, together, they form the engine that powers the market.  Markets really are a collection of forces all focused on trading.

Simplifying, you can look at the decline in the economy compared to the relative stability of the stock market (in light of the world shutting down), as proof of this. Economic stimulus played a massive role in propping up the market, but so did the comparative variety in why market participants trade. It's why you still see liquidity in the markets despite the decrease in consumer confidence and economic activity.  

Sure, the government created increased liquidity, stimulated markets, and even participated directly (and indirectly) at plunge protection.  But that is the playing field all traders have to play on right now.  It doesn't matter if it reflects the realities you see in the economy or the world.

Today's markets are much more complicated than before.  Moreover, the vast amount of information available (whether true, false, relevant, irrelevant, clarifying, or misleading) creates a vast signal-to-noise ratio challenge.  Meanwhile, many market participants (like many day-traders) have simply ridden the wave here, though it's unlikely that a vast majority of them truly understand what they're doing. Think of this as the "Smart Money" versus "Dumb Money" ... and it doesn't usually end well for one of them.

VisualCapitalist put together a great infographic looking at the difference in response to the shutdown via economic activity and the S&P 500 as of July 17th. 

Take a look. 

via visualcapitalist

The chart makes the valid point that the S&P 500 is not an equally-weighted index and is currently driven primarily by the tech giants, even with other industries struggling. 

Consumer sentiment is still a factor, and news cycles can absolutely still impact stocks, as evidenced by Kodak's meteoric growth (and subsequent decline) last week. 

All-in-all, there are lots of things influencing markets besides the economy. It is a lot to take in (especially for us humans who can only process seven things plus or minus two at any one time.

It is no wonder that Smart Money is relying more on exponential technologies (like AI and Big Data).

Be safe!

Onwards!