The Maanga

I wondered why Nassim Taleb likes Karen Armstrong, who penned this within a month of 9/11. Then I realized, a peaceful muslim is a black swan.

Bush seems to be doing almost everything right these days, despite being reviled as a lame-duck president. The surge has worked and Odierno, of the surprising felicitation below, has replaced Petraeus.  He coaxed Georgia into getting into a little war with Russia and as a consequence of Putin´s strong arm tactics and the oil price, the Russian stock market has been almost destroyed. He rescued Fannie and Freddie and AIG and let Lehman collapse. He even managed to persuade Bernanke into not cutting interest rates.  

While doing all this, he seems to be having fun too.   

Both Obama and McCain look like idiots in comparison. Both seem to be working very hard and have accomplished nothing. And both are dead boring. Neither can come up with these gems Weisberg has collated:  

“Soldiers, sailors, Marines, airmen, and Coastmen—Coast Guardmen, thanks for coming, thanks for wearing the uniform.”—the Pentagon, March 19, 2008 

“And so, General, I want to thank you for your service. And I appreciate the fact that you really snatched defeat out of the jaws of those who are trying to defeat us in Iraq.”—meeting with Army Gen. Ray Odierno, Washington, D.C., March 3, 2008 

So what has happened? When the Large Hadron Collider had  a test run last week, the world fell into a black hole, and we are in a parallel world,  where Bush is the bright one, and Obama and McCain are fools. Give him a third term, somehow.

PS: In this new world, all swans are black, so Taleb has to find something else to do.

In his essay, Gangui says that in the Divine Comedy, Dante attempts a rare synthesis of cosmology, philosophy and literature.  

Aristotle’s cosmos has a geocentric universe where the earth is surrounded by successive spheres of water, air and fire, then by the orbits of the moon, the planets and the stars. Beyond the stars is the Primum Mobile, prime mover, something that Aristotle postulated (in place of Gravitation) that caused all the planets and stars to move around the earth.  

The Christian view of the cosmos had heaven, hell and purgatory somewhere in between and was geocentric as well, as salvation was to be found on the earth.   

Dante tries to unify these frameworks. He keeps the Aristotelian framework, and places hell right below Jerusalem (he got that right). Hell has nine concentric spirals that moves out to the centre of the earth, where Lucifer lives. Placing Lucifer at the centre of the universe must have been quite a coup in the thirteenth century. Dante attempts to explain how dense land floats above water by claiming that land fled as far away from Lucifer as possible to the surface of the earth, anticipating modern plate tectonics by many centuries. Purgatory is a seven terraced hill on the opposite end of Jerusalem, Beatrice becomes Dante’s guide after Purgatory, taking him through different spheres of heaven, identifiable with the different orbits of the moon, the planets and the stars, and finally they can see the Primum Mobile, as in the illustration by Gustav Dore, which devout Dante identifies with God surrounded by his angels. The Cosmos according to Dante is complete, with Lucifer at the Centre and God at the far edge of the universe.   

While I have immense respect for Gangui, whose Ph.d adviser was Dennis Sciama (Stephen Hawking, David Deutsch and Martin Rees had the same advisor), this search for cosmic order in the middle of Dante’s randomness seems a bit unnecessary. As Nassim Taleb says, we must not be fooled by randomness in economics or finance, but should be quite happy to be fooled by it in art. A more interesting view of the Cosmos belongs to another Italian, Giordano Bruno.  

The best essays on Dante remain Borges’s “Nuevos Ensayos Dantescos”, new essays on Dante, where Borges speculates that the entire Divine Comedy is a dream, its elaborate structure designed to hide one thing: the unrequited love of Dante for Beatrice. As he says:  

“Beatrice existed infinitely for Dante. Dante very little, perhaps not at all, for Beatrice. All of us tend to forget, out of pity, out of veneration, this grievous discord which for Dante was unforgettable. Reading and rereading the vicissitudes of his illusory meeting, I think of the two lovers that Alighieri dreamed in the hurricane of the second circle and who, whether or not he understood or wanted them to be, were obscure emblems of the joy he did not attain. I think of Paolo and Francesca, forever united in their Inferno: ‘this one, who never shall be parted from me’. With appalling love, with anxiety, with admiration, with envy.”

Taleb´s function is to puke regularly on Wall Street. Maybe he puts his basic thesis best in a a paper titled “Bleed or Blow up”. If your portfolio is long options, it will bleed slowly because of the time decay, but would make lots of money once in a while. If it is short options, it will make steady money with little volatility for a long time, and then blow up suddenly one day.  

Most hedge funds are “Blow up” type, the best example being Victor Neiderhoffer, whose demise was admirably chronicled by John Cassidy.  Taleb did start a “Bleed” type hedge fund, called “Empirica Capital” whose rise was admirably chronicled by Malcolm Gladwell.  Empirica Capital, ahem, bled to death in the few years after that article was written. So Taleb had the time to take a sabbatical and write his second book, Black Swan.  

Taleb probably realized that taking his ideas to the logical extreme (if selling lots of options blows up your portfolio, buying  lots of options should make a lot of money), doesn’t work all the time. So, he tried to re-invent his bleeding (bloody?) hedge fund as Guerilla warfare. At certain times, it might pay being long a lot of options for a short while. Trouble is no one knows what these times are. His trader, Mark Spitznagel, was about to start a new hedge fund in July 2007 to go long options. He was just a bit too late. All the money had already been made by Paulson Capital and Goldman Sachs.  

So, Taleb is not a great money manager himself. But he is very good for saying the Wall Street is rotten. Just like Maanga might not be a great blog in itself (Though I would think the presence of Gasquet fan alone puts it among the giants), but a fantastic one for puking on rotten blogs.  

A writer´s thinking evolves as he lives. “Fooled by randomness” definitely argued for a hedge fund like “Empirica Capital”. After the failure of his hedge fund, Taleb realized that there were some black swans that could be tamed when he read Benoit Mandelbrot´s “(Mis) behavior of the markets” and added those to his list as grey Swans. He also learned a little more about human behavior, about why investors loved “Blow up” type hedge funds as opposed to “Bleed” type hedge funds by studying more prospect theory developed by Daniel Kahnemann and Amos Tversky.  A recent essay by him in Wilmott magazine says most of what Taleb wants to say without the stories.  

So  Black Swan = Fooled by randomness + Prospect Theory + Benoit Mandelbrot  

There are better attacks on Wall Street, but those have gone unnoticed because the papers have been more technical or because Wall Street, that consensus thinking, self-reproducing force like mommy bloggers, doesn’t care. The best in my opinion is a paper by Richard Roll, innocently titled “A mean variance analysis of tracking error” whose one line summary calls into question all of  long only asset management as currently practiced. For Long/short or hedge fund strategies, the equivalent is a paper by Andrew Weisman called “Dangerous Attractions”.  It might be worth paying the $45 that you paid for Taleb´s book to read his paper.