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Taleb Explains How He Made Millions On Black Monday As Others Crashed

October 16, 2017 Tyler Durden 0

Former trader and author of best-selling book “The Black Swan” sat down for an interview with Bloomberg News to mark the upcoming thirtieth anniversary of the stock-market crash that occurred on Oct. 19, 1987 – otherwise known as Black Monday.

Taleb famously supercharged his career – and earned a considerable sum of money (though turns out it was less than Taleb felt he deserved) – thanks to his trading profits from that day, which he said were in the “tens of millions of dollars.”

But what did he trade, and how? And furthermore, what was going through his head as he watched the market crumble around him?

Answering a question about what specific strategies he employed, Taleb explained that he relied on “tail options” – contracts that, because they were way out of the money, could be purchased for negligible sums – and placed most of his bets in “professional” markets like currencies and Eurodollar futures.

“The dollar of course collapsed. Dollar-yen options – we had options we had bought for $10,000 in inventory that were selling for 17 million.

 

The thing was going…it was out of control. The big payoffs weren’t in the main, big currencies, but in the ones where the move was a big surprise like Eurodollar or yen. The Swiss franc also had high volatility.”

Asked why the movements in currency and fixed income markets weren’t as heavily covered as the moves in the stock market – which is where the bulk of that day’s carnage unfolded – Taleb said it’s because these markets are strictly for professional traders. Few middle-class investors traded bonds or owned foreign currencies outright back – but everybody seemed to own stocks.

“Because it was a professional market…it was the largest market, fixed income, at the time…but only professionals talk about these things. And all the professionals that were around then are dead…Everybody talks about stocks because people invest in stocks.”

Taleb declined to disclose how much First Boston – the investment bank at which he was employed – paid him for his success that day, though he did say that, because most of his colleagues lost money, the sum was smaller than he had hoped.

“I remember the P&L. In today’s terms for the firm it would be something substantial. But at the time, compensation wasn’t the same. It was in the mid-tens of millions. I made $60, $70, $80 million in one day.

 

First Boston treated me very well. The problem was that it was still a common system where everybody had to share…and everybody had lost money except for me and one other fellow.”

Taleb said he vividly remembers Oct. 20, the day after the crash, when, he said, nearly all of his counterparties were outbidding his offer for his options positions by massive margins.

He specifically remembers trading with famed commodity speculator Richard Dennis, whose hedge fund went bust that day.

“I remember the [October 20], I get on the phone…and I remember there was a fellow called Richard Dennis who went bankrupt that morning at the open. There was a rally in interest rates and the guy was short eurodollars…he lost his $50 million fund…they were liquidating the thing. And I remember I had a huge delta in eurodollars. I remember then vividly offering something on the phone and filling it considerably higher. So, the guy in the pit, I’d say let’s sell here and he’d sell higher. It was like the movie trading places…all morning I remember we were selling above our offers.”

Taleb says the events of Black Monday left a lasting impression on him. His success made him brash and overconfident. But it also confirmed his view that the market’s approach to calculating risk failed to take into account the possibility of “six sigma” moves like the Black Friday crash. Indeed, that trend has only worsened with the advent of ETFs and high-frequency trading, which many market strategists believe increase the likelihood of chaotic selloffs like the May 2010 flash crash.

“After the event, I knew that all this stuff you learn in class, the Black-Scholes model, is useless…”

Asked what was going through his head when equity valuations were plummeting all around him, Taleb replies that he was so focused, he wasn’t able to process the enormity of that day’s events while they they were happening. All of his attention was focused on executing trades.

“When you’re trading, it’s like being in a battle. It’s like TV. When I’m watching TV, I don’t know what’s happening during the episode. It’s not until later that I find out. I was in a state of heightened concentration.”

It wasn’t until a colleague pointed out the magnitude of the move that Taleb began to understand that this might be a once-in-a-lifetime opportunity.

“Someone came to me and made a remark…something like don’t they know that six sigmas are something you only observe once in your lifetime?”

Indeed, it would be 20 years before Taleb would book similarly outsized profits after he joined a handful of contrarians in shorting the market ahead of Lehman Brothers’s September 2008 bankruptcy filing.

As for the extreme focus he exhibited on that day, Taleb said there have been a handful of occasions where he has had to maintain a monk-like level of focus for a prolonged period. He cited the invasion of Kuwait as one example, saying he arrived at First Boston’s office at 2 am, and remained in a state of concentration for 15 or 16 hours.

Ultimately, he says, traders are still underestimating the likelihood of another flash crash. Given the fact that realized volatility recently fell to record lows, this year’s relatively placid equity market has fostered a widespread sense of complacency in markets.

But that could all change in 24 hours’ time.
 

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New Tech Could Turn Seaweed Into Biofuel

October 16, 2017 Haley Zaremba 0

In the future, we may not look up to the sun for energy, but down into the ocean’s depths. This month the U.S. Department of Energy announced an investment of nearly $1.5 million in projects to develop renewable energy from Hawaiian seaweed, following large investments in other parts of the nation in a new push toward the potentially groundbreaking development of seaweed-based biofuels. The $1.5 million will go toward establishing two large-scale offshore seaweed farms for development and production of biofuels. Of this hefty sum, $995,978…

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Should The Middle Class Pay More For A Loaf Of Bread Than The Poor?

October 16, 2017 Tyler Durden 0

Authored by Mike Shedlock via MishTalk.com,

Iowa seeks to become the first state to dump Obamacare in favor of a state-run program that will allegedly lower costs.

I suggest Iowa’s replacement plan can’t work. My reason pertains to the title question.

With efforts to repeal the Affordable Care Act dead in Congress for now, a critical test for the law’s future is playing out in one small, conservative-leaning state.

 

Iowa is anxiously waiting for the Trump administration to rule on a request that is loaded with implications for the law’s survival. If approved by the federal Centers for Medicare and Medicaid Services, it would allow the state to jettison some of Obamacare’s main features next year — its federally run insurance marketplace, its system for providing subsidies, its focus on helping poorer people afford insurance and medical care — and could open the door for other states to do the same.

 

Iowa’s Republican leaders think their plan would save the state’s individual insurance market by making premiums cheaper for everyone. But critics say the lower prices come at the expense of much higher deductibles for many with modest incomes, and that approval of the plan would amount to another way of undermining the law.

 

Iowa calls its request a stopgap plan that would allow the state to opt out of the federal health insurance marketplace, HealthCare.gov, for 2018 and create a state-run system that its insurance commissioner says would lower premiums for the 72,000 Iowans who currently have Obamacare health plans, including 28,000 who earn too much to get subsidies to help with the cost.

 

But the cheaper premiums would come with a big trade-off: higher out-of-pocket costs. The only option for customers would be a plan with deductibles of $7,350 for a single person and $14,700 for a family. The proposal would also reallocate millions of federal dollars that the health law dedicates to lowering costs for people with modest incomes and use the money for premium assistance to those with higher incomes, no matter how much money they make.

 

The individual insurance market is particularly fragile in Iowa, partly because the state has allowed tens of thousands of people to keep old plans that do not meet the health law’s standards. Aetna and Wellmark Blue Cross & Blue Shield, the state’s most popular insurer, are both withdrawing at the end of the year. The only insurer planning to remain, Medica, is seeking premium increases that average 56 percent, blaming Mr. Trump’s ongoing threats to stop paying subsidies known as cost-sharing reductions that lower many people’s deductibles and other out-of-pocket costs. Wellmark has said it will stay if the stopgap plan is approved.

 

“What we are trying to address is a really large number of people being priced out,” said Doug Ommen, the state’s Republican insurance commissioner.

No Medical Insurance Available

Aetna and Wellmark Blue Cross & Blue Shield will both pull out of Iowa starting in 2018. Only one insurer, Medica, plans to remain. But Medica wants a 56% premium hike. Wellmark will stay if the stopgap plan is approved.

If the stopgap plan is not approved and Medica does not get approval for a 56% premium hike, the state will have no providers for individuals or families not in a corporate plan.

Step in the Wrong Direction?

Is this a good idea or a bad idea? The alternative might be no insurance providers to choose from.

But what percentage of families can afford $14,700 if something happens?

The proposal adds subsidies based on federal poverty levels to make things more affordable for low-income earners.

Federal Poverty Levels

Sock it to the Middle Class

Individuals making more than $48,240 and couples making more than $64,960 get crucified under the plan. The stopgap plan table shows why.

Cliff Synopsis

  • An individual, aged 25 making up to 150% of the poverty level ($18,090) will pay $108 per year.
  • An individual, aged 25 making up to 301%-400% of the poverty level ($48,240) will pay $792 per year.
  • An individual, aged 25 making up to 401% of the poverty level ($48,241) will pay $3,516 per year.
  • An individual, aged 60 making up to 150% of the poverty level ($18,090) will pay $300 per year.
  • An individual, aged 60 making up to 301%-400% of the poverty level ($48,240) will pay $2,136 per year.
  • An individual, aged 60 making over 400% of the poverty level ($48,240) will pay $9,504 per year.
  • A couple, both aged 60, making over 400% of the poverty level ($64,960) will pay $9,504 per year.

In addition, an individual would have a deductible of $7,350. A family would have a deductible of $14,700.

The article claims “The proposal would also reallocate millions of federal dollars that the health law dedicates to lowering costs for people with modest incomes and use the money for premium assistance to those with higher incomes, no matter how much money they make.”

The posted table says otherwise.

Fatal Flaw

The fatal flaw in the plan should be obvious. Those making over 400% of the poverty level will opt out.

Those pie-in-the-sky premiums of a mere $300 a year for those aged 60 making the poverty level will never cover costs because a huge percentage of those making over 400% or the poverty level will opt out.

Should the Middle Class Pay More for a Loaf of Bread?

A major flaw in Obamacare is the notion that everyone should pay the same price. Under the plan, young and healthy millennials overpaid, effectively subsidizing older and/or physically obese persons. The millennials opted out.

The Iowa plan may capture millennials, but because of the screw job on the wealthy, those making over 400% of the poverty rate will drop out.

Effectively the state said if you can afford to pay more you must pay more.

Imagine grocery stores charging $15 for a loaf of bread if you make $48,241 but only 48 cents if you make up to $18,090.

The idea is preposterous.

Insurance for those older should cost more than those younger. Insurance for unhealthy individuals should also cost more. But that’s where it has to stop.

Obamacare is blowing up because it seeks to redistribute costs in a way that cannot possibly work. The Iowa replacement plan will fail for similar reasons. One plan screwed the young and the healthy, the other screws those the state deems to be able to afford to be screwed.

That cliff is a mere $48,240 for individuals and $64,960 for a couple.

A couple making $64,961 would have to pay over $24,000 out of pocket before insurance covered a dime.

This is a huge screw-job not on the wealthy, but on the middle class!

 

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4NEW – Initial Coin Offering Announcement

October 16, 2017 BitNewz.net 0

The world’s first eco-friendly, tangible, Waste to Energy, blockchain solution. State of Affairs One Bitcoin transaction consumes as much energy as 7.55 homes in the United States for 1 day, compared to one Ethereum transaction that consumes as much energy as 1.34 homes in the United States for 1 day as of this article. In … Continue reading 4NEW – Initial Coin Offering Announcement

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4NEW – Initial Coin Offering Announcement

October 16, 2017 Guest Author 0

The world’s first eco-friendly, tangible, Waste to Energy, blockchain solution. State of Affairs One Bitcoin transaction consumes as much energy as 7.55 homes in the United States for 1 day, compared to one Ethereum transaction that consumes as much energy as 1.34 homes in the United States for 1 day as of this article. In … Continue reading 4NEW – Initial Coin Offering Announcement

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ICO Ban in Japan – a ‘Definite Possibility’

Many believe that Japan is leading the way in Asia when it comes to cryptocurrency, especially since China removed themselves from the race. However, Japan is not really that ICO friendly, says cofounder of IndieSquare. Find out more.

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Real Estate on the Blockchain: More Sellers Want Crypto

October 16, 2017 BitNewz.net 0

This week, there have been some interesting developments within the crypto/property space. Firstly, Magnum Real Estate Group president, Ben Shaoul spoke to CNBC about his latest project. He’s currently developing several condominiums on the Lower East Side of Manhattan. Each will hit the market for between $700,000 and $1.5 million for which he’s willing to accept payment in Bitcoin. … Continue reading Real Estate on the Blockchain: More Sellers Want Crypto

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