Falsifiability

So true
Funny how it seems
Always in time
But never in line for dreams
--Spandau Ballet

Falsifiability is the logical possibility that an assertion can be proven false by a particular observation or experiment. Falsifiability does not mean that a statement is false. It means that if the statement was false, that its falseness can be demonstrated.

For example, claiming that 'no two people are the same' (perhaps regarding a certain trait or behavior) is not falsifiable because it doesn't seem possible to prove wrong. Regardless of how many people are compared and found to be different, one might have to keep comparing all people forever in order to detect a false case.

On the other hand, claiming that 'all people are the same' is falsifiable because presenting one case of differences proves the statement wrong.

Karl Popper (1959, 1963) argued that falsifiability is an important concept in science. Although not sufficient, falsifiability is a necessary criterion for scientific ideas. However, he suggested that unfalsifiable statements such as meta-physical and religious propositions are not without relevance and may lead to testable theories down the road.

Popper also viewed that falsifiable theories that have withstood long periods of testing may be seen as corroborated by experience but not necessarily confirmed. Corroboration through experience does not guarantee that a theory is true. Thomans Kuhn's (1962) work is consistent with this view.

Popper held that falsifiability is a special case of the general notion of criticizability. Criticizability is the openness of an assertion to criticism--i.e., to the logical possibility of specifying what would show the assertion to be mistaken.

The idea is that without openness to criticism, it is difficult to approach truth.

References

Kuhn, T.S. (1962). The structure of scientific revolutions. Chicago: University of Chicago Press.

Popper, K. (1959). The logic of scientific discovery. New York: Basic Books.

Popper, K. (1963). Conjectures and refutations. London: Routledge.

Fed's Primary Motive

Welcome to the grand illusion
Come on in and see what's happening
--Styx

ZeroHedge argues that the primary motive behind the Fed's stock market friendly policies is not to line the pockets of the wealthy, although that is certainly occuring. Instead, it seeks to prop up the value of equity-laden pension funds.

As a fraction of total assets, US pension funds own more stocks than similar funds in other countries. In fact, pension funds in other countries have generally decreased their allocations to equities since the last market meltdown.

By trying to uphold the paper wealth gains of future retirees, the Fed thinks that it will avoid a general decline in confidence that keeps social fabric from ripping.

In other words, the Fed is trying to preserve the legitimacy of the welfare state.

position in SPX

Defensive Routines

"These walls were not meant to shut out problems. You have to face them."
--Mother Abbess (The Sound of Music)

Defensive routines are thoughts and actions employed by individuals, groups, and organizations to protect their usual ways of dealing with reality (Argyris, 1985: 5). Essentially, defensive routines are behaviors to prevent or avoid embarassment or threat.

Common defensive routines include blaming, stereotyping, advocating views without encouraging inquiry, acting to save face, making arguments personal, intellectualing, and creating diversions. Defensive routines can take the form of physical action as well as mental thought processes.

Defensive routines are components of fast thinking, and probably a consequence of our evolutionary past. While they might promote near term self-protection, defensive routines discourage learning over the longer run. Difficult situations are avoided rather than faced.

By helping us avoid our problems, defensive routines blind us to improvement possibilities.

Reference

Argyris, C. (1985). Strategy, change, and defensive routines. Boston: Pitman.

Volume and Non Economic Buyers

Tonight is fading fast
The sun is rising
I've been down so many times
Now I'm realizing
--March Violets

What should happen to volume if non-economic buyers (NEBs), such as central banks, were buying securities? Either directly or through agents, NEBs would accumulate increasingly larger fractions of shares outstanding. Less shares would be available for other entities to trade.

Over time, volume should decline.

While possibly due to less enthusiasm among traders, the present declining volume phenomenon can also be explained by increased buying by NEBs such as central banks.

Soros Put Position

I see a red door
And I want it painted black
No colors anymore
I want them to turn black
--Rolling Stones

Hard not to raise an eyebrow at George Soros' position in S&P 500 index puts. While it oscillates from quarter to quarter, Soros has been increasing his put position, particularly over the past year.

In the most recent reported quarter, the position was $2.2 billion large, which equates to about 17% of assets under management.

Why Soros has been increasing this bearish bet, which of course, can be construed as a downside hedge against other other positions, is unknown.

position in SPX

Central Banks and Government Spending

There's a room where the light won't find you
Holding hands while
The walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Interesting statement at the end of this screed: "Central banks exist to make it easier for insolvent governments to borrow money."

In ZIRP (zero interest rate policy) or NIRP (negative interest rate policy) regimes, financial repression prompts investors to reach for yield. This permits the US government, already $17 trillion in the hole, to sell even more Treasury debt with uber low coupons. In an unhampered interest rate environment, the cost of selling that debt would be much higher.

Of course, it also helps that the Fed, thru its QE programs, happens to the biggest buyer of US debt as well.

Much of this Ponzi-esque silliness would cease if investors took the view that buying sovereign debt is essentially sanctioning the use of force on others. Viewed thru this ethical lens, sovereign debt should not be bought, because those who do are contracting with government agents to force people into conditions of involuntary servitude.

Until more people decide not to play, central banks enable governments to borrow and spend much more than the could otherwise.

Lauren Bacall

Philip Marlowe: How'd you happen to pick out this place?
Vivian Rutledge: Maybe I wanted to hold your hand.
Philip Marlowe: Oh, that can be arranged.
--The Big Sleep

Lauren Bacall passed away yesterday at age 89. Sultry and cool, Bacall made memorable moments on film--many of them with husband Humphrey Bogart.

Fortunately for us, those performances live on. RIP Betty.

Another Buyout

"Your boy really did his homework on this one, Fox. And you'll have the shortest executive career since that pope that got poisoned."
--Investment banker (Wall Street)

The assets once owned by my former employer are once again in play. We've reviewed the timeline and the sage previously.

In the late 1990s, the company was purchased by a Scandinavian operator. When that merger didn't work, the assets were sold to an arm of a large private equity firm.

That didn't work either. After all, what did the private equity folks know about making paper? Also, like all PE firms, they were operating with big leverage. As markets continued to sag, Chapter 11 beckoned. After a year or so of that, the PE firm has basically transferred control to creditors.

The syndicate of creditors don't want the thing. So they've tentatively accepted an offer from another operator in the industry. This company is smaller and has a worse balance sheet than the target.

With both companies and end markets so weak, how can this deal get done? Well, the junk bond market has been on fire (although that may be changing), enabling high credit risks to obtain debt financing on the cheap. Also, the syndicate of creditors has apparently offered what amounts to 'vendor financing.'

Similar to the classic scene from Wall Street, where the lending syndicate for the Blue Star buyout gets assurance that its loans will be paid back by selling planes and hangars, it seems like this merger only gets done with the promise of more shutdowns, closures, and asset sales.

While visiting friends on their Central Wisconsin farm this past weekend, I spied the familiar candy-striped smoke stacks of the Biron Mill--where I began my career. Couldn't help but wonder if those stacks will soon go dormant for good.

If so, then this sad story of decline may approach closure.

Intuition and Flow

"A good martial artist becomes not tense, but ready. Not thinking, yet, not dreaming--ready for whatever may come. When the opponent expands, I contract. When he contracts, I expand. When there is an opportunity, I do not hit. It hits all by itself."
--Bruce Lee (Enter The Dragon)

When individuals are under pressure in complex situations, careful reasoning is often not a viable option because of the short time period that frames need for decision. Well developed intuition is necessary to guide decision-making under conditions of threat, confusion, and time constraints.

Essentially, intuition is knowing something without having to engage in large amounts of analysis.

Intuition is sometimes referred to as "gut feel," which implies an emotive, mystic sense that derives from psychic processes that defy explanation. But it is not mystical. Effective intuition is informed. Research shows that it is the product of pattern recognition. The mind scans thousands of past patterns for matches with present situations. If matches are found, then decisions reflect judgment of what is required to successfully navigate the present situation in accordance with what is perceived to have worked in previously similar patterns.

Developing effective intuition, then, requires exposure to thousands of patterns, cataloguing them into memory, then developing capacity for quick retrieval from the catalogue.

That last piece, quick retrieval, is key. Under tense situations our minds are apt to freeze, to block. We are unable to access past patterns for use.

The mind must flow, not block, under high pressure situations. No worries, no expectations, no past, no future.

Instead, clear, preaceful, flowing in the here and now so that intuition can quickly do its work.

Testing Mindset

"It ain't the six minutes...it's what happens in those six minutes."
--Elmo (VisionQuest)

The common mindset for a pending test is to be nervous and fearful. Fear of making mistakes, embarrassment, failure.

An alternative mindset is to welcome tests. After all, it is a rare moment to show what you know. Such opportunities do not come along every day.

Look forward to tests. Put your all into it. Do your best, and relish the moment.