Mathematics is the soul of science as the vowels
are the souls of Hebrew letters. The theoretical models of math are similar to
the angelic models of our physical world. There are angels representing each
nation, each star in the sky, each blade of grass. Mathematical principles of
engineering are edifices in the world of Yetzirah; they are tools in the world
of Asiyah. We should know that G-d provides us with ideas. He sends them on
the ‘wings of angels’ to help us build the world around.
Euler’s theorem can be used to derive all the trigonometric
identities with complex algebra. Basically replace all trigonometric formulas
with exponentials having the imaginary j or i in the exponent and
There was an episode of ‘Ed’, a lawyer/bowling alley series,
where Danny Davido, a comedian, plays a con artist. He sends out letters to
people predicting which baseball team is going to win a particular game. An
unfortunate victim who received five letters with correct predictions decides to
place a bet with the con-artist’s bookie on the sixth prediction.
Needless to say he loses his money. Why, would the trend fail at this point?
Danny explains to his lawyer that he sends out 1000 letters with his first
recommendation, then 400 letter follow-ups where he was successful, than 100
letter follow-ups, etc. The point is there will be a few people who will get
letters where he was right five times in a row.
The point of this story
is that one should be very careful about investing on a trend. For example, in
mutual fund investing, there may be a handful of funds that seem to beat the
averages, but this may be simply because of chance. Human beings have mental
functions that are good at picking out trends. When we were hunters and
scavengers, this helped us return to good places to find food or water.
Information was limited and recognizing a trend was more likely to have reason.
Today with massive communication systems, trends of a few are more like the
con-artist scheme above. Our minds, has vshalom, overlook that one
investment’s success is often by chance because we picked it out of a
thousand failures. This is related to the illness of gambling.
Market resembles gambling, because the holders of individual stocks and mutual
funds are distributed to program trading machines. This information is used to
manipulate prices for the maximum loss to individuals. For those who
wouldn’t gamble in Las Vegas, one must be careful of stock markets.
Personal business is a better choice. Corporations have out of proportion
salaries for CEOs with stock options that dilute shareholder value.
Nevertheless, the CEOs have incentive to grow the stock price in order to sell
these holdings, but often this is done on a cyclical basis without a net growth
in the assets for the long-term investor.
Seasonal cycle that sometimes occurs
James Dines: "Stocks: The month of May used to be an inauspicious
month for new buying, but it has been improving. Despite many years of rising
markets, May has seen the DJI decline in 22 of the last 40 years, 55% of the
time, or has proven to be the prelude to significant declines in Junes or Julys
- that pave the way for the traditional "Summer Rally." Since 1965, the period 1
May to 30 Jun has been a loser 60% of the time (24 out of 40 years.) But, 13 of
the 16 exceptions (81%) occurred in the last 22 years, so the period has been
getting less bearish. May is the beginning month for the worst six months (1 May
- 31 Oct) of the year, a bullish factor for golds since they tend to move
opposite the market. The statistics were based on the Dow's average percentage
change for the six-month periods from 1950-2003 as applied to an arbitrary
investment portfolio of $10,000. Specifically, when compounded annually starting
in 1950, buying in May and selling by Oct, a $10,000 investment was reduced to
$9,682 by 2003, reflecting a loss of $318. On the other hand, buying in Nov and
selling by Apr resulted in an appreciated value of $492,060, reflecting a
$482,060 profit by 2003.
Memorial Week Rally: Investors who nonetheless insist on buying
might as well do so before the start of Memorial Day weekend, May 23 to May 27
this year. The DJI rose during that week 12 years in a row (from 1984-1995) -
also 1999, 2000, 2003, and 2004. Downers during the Memorial Day holiday include
1996, 1997, 1998, 2001 and 2002. All told, the "memorial week rally" has come
true 76% (16 of 21) of the time in the last 21 years.
For the longer term
the multi-year business cycle suggests during the market peak, (interest rates
climbing) hold money market or drug/medical companies, during the contraction
(interest rates have stopped going up), average into the market in dividend
instruments. During the trough, (interest rates have started declining),
invest in growth stocks, oil, copper, and REITs. During the expansion,
(interest rates are flat or have started rising), invest in growth
The fact is that equities were over-valued
for years, making them vulnerable to the kind of brutal, sudden sell-off we've
just witnessed. But now that the S&P has declined 40% in 12 months, the
question is whether equities are at long last a bargain. The answer is a
qualified yes: Stocks aren't exactly cheap, but for the first time in years you
can expect decent returns, provided you're patient.
"If you buy now (Dow 8400) and wake up in 10 years, you'll probably get a
return around the historic average," said Yale economist Robert Shiller. In the
near term, however, Shiller - who correctly predicted the implosion of the
stock-market and real-estate bubbles - is more cautious. "There is a substantial
risk that with all this economic turmoil, stocks will fall far lower," he
But make no mistake, stocks are now at levels where buying makes sense.
The best measure of stock valuation is Shiller's own index of
price-earnings multiples. Shiller uses a 10-year average of inflation-adjusted
earnings to calculate an adjusted P/E. The advantage to the Shiller method is
that it smoothes out the peaks and valleys in profits.
Example: In the 2003 to 2006 period, earnings soared to historic heights,
jumping from a normal 9% of gross domestic product to an extraordinary 12%. The
profit bubble made P/Es look artificially low, handing the stock jockeys a
logical-sounding reason to claim that equities were a buy, when in fact they
were overpriced. Both the "P" and the "E" were in a bubble - the "P" even more
than the "E." When the "E" collapsed in the face of the current downturn, the
outrageous valuations were rudely exposed.
To see how out of whack P/Es had gotten, let's take a look back. From 1890
to the early 90s, the average Shiller P/E stood at 14.6. It dropped as low at 6
in the early 80s, and never went over 24. Then, in the late 90s, P/Es regularly
stood at over 30, and at their peak in 2000 hit 44.
In the bear market that followed, P/Es dropped - but only into the low-20s.
Then they took off again, averaging 25 to 28 from 2003 to the beginning of this
year. Now they're at 15.7, not far from their pre-bubble average. That decline
is tonic for investors. Research by economist and hedge fund manager Cliff
Asness shows that buying in at a high Shiller P/E usually leads to poor returns,
while grabbing stocks at a low Shiller P/E is a reliable route to
From today's levels, what can we expect? Stocks' future return is closely
related to the inverse of the P/E, also known as the earnings yield. So at a P/E
of less than 16, investors should obtain real, or inflation-adjusted, gains of
around 6.5%, which is about what Asness found in his research. Add 2.5 points
for inflation, and the nominal return comes to a respectable 9%. That's about a
point below stocks' long-run return, but it's far better than anything investors
could expect for a decade and a half.
The rub is that getting even that 9% return won't be easy. Assuming no
escalation of P/Es, stock returns come from a combination of earnings growth and
dividend income. Earnings per share grow only at about 2% a year after
inflation. (Total earnings grow faster than that, but new issues of stock dilute
that growth.) So add in our 2.5% inflation rate to 2% real growth, and you still
need a dividend yield of 4.5% to get to that 9% goal. The yield on the
S&P 500 is now around 3.3%, versus around 2% earlier this decade. That's
better, but not enough.
Finally, remember this: Shiller points out that stocks were cheap in the
early 1930s, and investors who bought then eventually made good money. But it
took them many years to get there. So if you buy now, stick with strong
dividend-paying stocks, and fasten your seatbelts. It will be a bumpy
3/2008 TORONTO — The bottom of the
financial-market downturn could still be several months away and will hinge on a
bottoming of the U.S. housing market, former Federal Reserve Board Chairman Alan
Speaking with TD Bank chief economist Don Drummond in a
loosely structured discussion in front of a luncheon crowd of about 2,000 in
downtown Toronto, Mr. Greenspan said housing values might have another 5 to 10
per cent to decline before they bottom, “sometime in the first half of
next year.”The Economic Mess and Financial Disaster that
Obama Will InheritNouriel Roubini
| Nov 6, 2008
The good news is that
America has just elected a president with leadership, vision and great
intelligence. President Obama will also choose a first rate economic team:
individuals such as Larry Summers and Tim Geithner would be excellent choices
for the position of Treasury Secretary. Obama and his team are fully aware of
the very difficult economic and financial challenges that the country is facing
and will work hard to resolve them.
However, Obama will inherit and economic
and financial mess worse than anything the U.S. has faced in decades: the most
severe recession in 50 years; the worst financial and banking crisis since the
Great Depression; a ballooning fiscal deficit that may be as high as a trillion
dollar in 2009 and 2010; a huge current account deficit; a financial system that
is in a severe crisis and where deleveraging is still occurring at a very rapid
pace, thus causing a worsening of the credit crunch; a household sector where
millions of households are insolvent, into negative equity territory and on the
verge of losing their homes; a serious risk of deflation as the slack in goods,
labor and commodity markets becomes deeper; the risk that we will end in a
deflationary liquidity trap as the Fed is fast approaching the zero-bound
constraint for the Fed Funds rate; the risk of a severe debt deflation as the
real value of nominal liabilities will rise given price deflation while the
value of financial assets is still plunging. This is the bitter gift that the
Bush administration has bequeathed to Obama and the Democrats.
dismal background, let us consider next in more detail the macro outlook for the
U.S. and global economy and its implications for financial markets...
latest U.S. macro news have been worse than awful: collapsing retail sales and
consumption, free fall in capex spending by the corporate sector, sharply
falling industrial production, sharply falling employment, housing still in free
fall and home prices bound to fall 40% from the peak, collapsing auto sales,
forward looking indicators of business (ISM) and consumer confidence dropping to
multi-decade lows, sharp surge in corporate defaults, a wrecked banking system
and financial system that will have to be partially nationalized. This is the
most daunting set of economic and financial challenges that any president has
had to face since FDR during the Great Depression. And in the meanwhile in the
rest of the world things are as bad: a severe recession in Europe, Japan and
other advanced economies; the risk of a hard landing in many emerging markets
including China; an almost certain global recession; a severe global financial
So let us not delude each other: the U.S. and global recession train
has left the station; the financial and banking crisis train has left the
station. This will be a long and severe and protracted two-year recession
regardless of the best intentions and good policies of the new U.S.
administration. It will take a lot of hard work and sound policies to clean up
this mess and reduce the length and severity of this economic
And in the meanwhile the brief bear market sucker’s rally
in the equity market has lost its steam and U.S. and global equities are
starting to plunge again. As I argued for the last few weeks this was a bear
market rally and markets could not defy the laws of gravity: a slew of ugly and
worse than expected macro news, earnings news and financial news was bound to
take a toll on equities and other risky assets. And now, after a brief rally
markets are starting to plunge again. For 2009 the consensus estimates for
earnings are delusional: current consensus estimates are that S&P 500
earnings per share (EPS) will be $90 in 2009 up 15% from 2008. Such estimates
are outright silly and delusional. If EPS fall – as most likely – to
a level of $60 then with a multiple (P/E ratio) of 12 the S&P500 index could
fall to 720
, i.e. 20% below current levels; if the P/E falls to 10
– as possible in a severe recession, the S&P could be down to
or 35% below current levels. And in a very severe recession one
cannot exclude that the EPS could fall as low as $50 in 2009 dragging the
S&P500 index to as low as 500.
So, even based on fundamentals and
valuations, there are significant downside risks to U.S. equities.
brief sucker’s rally is over and a reality check is now dawning on markets
and investors. Expect this financial crisis and economic recession to get much
worse in the next 12 months before it gets any better. We are nowhere near a
bottom for housing, the U.S, economy, the global economy and financial markets.
The worst is ahead of us rather than behind
us.Indeed, as I put in in a note in
So risks and vulnerabilities
remain and the downside risks to financial markets (worse than expected macro
news, earnings news and developments in systemically important parts of the
global financial system) will dominate over the next few months the positive
news (G7 policies to avoid a systemic meltdown, and other policies that –
in due time – may reduce interbank spreads and credit spreads). So beware
of those who tell you that we reached a bottom for risky financial assets. The
same optimists told you that we reached a bottom and the worst was behind us
after the rescue of the creditors of Bear Stearns in March, after the
announcement of the possible bailout of Fannie and Freddie in July, after the
actual bailout of Fannie and Freddie in September, after the bailout of AIG in
mid September, after the TARP legislation was presented, after the latest G7 and
EU action. In each case the optimists argued that the latest crisis and rescue
policy response was “THE CATHARTIC” event that signaled the bottom
of the crisis and the recovery of markets. They were wrong literally at least
six times in a row as the crisis- as I consistently predicted here over the last
year – became worse and worse.
So enough of the excessive optimism that
has been proven wrong at least six times in the last eight months alone. A
reality check is needed to assess the proper risks and take the appropriate
actions. And reality tells us that we barely literally avoided only a week ago a
total systemic financial meltdown; that the policy actions are now finally more
aggressive and systematic and more appropriate; that it will take a long while
for interbank markets and credit markets to mend; that further important policy
actions are needed to avoid the meltdown and an even more severe recession; that
central banks instead of being the lenders of last resort will be for now the
lenders of first and only resort; that even if we avoid a meltdown we will
experience a severe US, advanced economy and most likely global
, the worst in decades; that we are in the middle of a severe
global financial and banking crisis, the worst since the Great Depression; and
that the flow of macro, earnings and financial news will significantly surprise
(as this past week) on the downside with significant further risks to financial
One should choose a field that will give one time to study and practice
Torah. The sages would recite mishnayot while practicing manual labor. One
should pay his workers at the end of the day for their service. One should
treat ones supervisor lightly because they are under a burden.
27.5.1 Rule of 72
72 divided by the interest rate is the number of months to double ones
money. For example, at 7% interest, it would take a little over 10 years to
27.5.2 Division of investments
- Bava Metzia 42a Rabbi Yitzchok: A person should invest 1/3 of his money in
business, another third in real estate and the last third in cash.
- Another rule is to give after all business expenses 10% to Jewish education
or charity which can include Jewish businesses.
18.104.22.168 Business (1/3)
This refers to ones personal business or other types of business. The 1/3
is the maximum value when one is young and just starting out.
recommendation is to use Vanguard target retirement funds which scale down the
business ratio and increase the cash ratio overtime. For example, VTINX is
Vanguards retirement fund after the age of 65. Another example is VTTVX for
expected retirement in 2025 and VTHRX is for expected retirement in 2030. The
way to determine the target retirement year is:
(65 – current age) + current year = Target retirement
For example at the age of 49 this gives (65-49)+2011 = 2027. In this
case ones investment would be 60% in VTTVX and 40% in VTHRX.
22.214.171.124 Real Estate (1/3)
This would be a personal house and perhaps a rental. Real estate
investment trusts (REITs) would occur here as well.
126.96.36.199 Cash (1/3)
Basically saved liquid assets. This might include bonds. Put 30% in VFIDX
is the intermediate bond fund. Put 50% in VWEAX is the long-term industrial
bond fund. Put 10% in a municipal bond fund preferably for ones state of
residence. Leave 10% in short term treasuries or money markets.
Joint tenancy can be subjected to the gift tax if it is a gift. It also
doesn’t update the cost basis on property.
2013 Defense budget
2014 Defense budget $498B
$520.46B with the OCO (overseas contingency
$80B supporting troops and
maintainence of overseas deployed equipment. Non-defense discretionary spending
Total would be
$1,012.3B. $498B à
$486.9B with OCO à $85.2B à $92B – $572.6B is $20B less than requested.
Of the $486.9B: $72.9B à $63B for new defense
R&D. $5.1B for science research. $29.9B à $29.9B for NIH.
2015 Defense budget $512.05B à
$521.27B. Non-defense discretionary spending $483.13B à
I include philosophy in the area of mathematics although most would prefer
the reverse. Philosophy at its best is mathematical. Overall, it is an area of
study that takes ones mind out of conventional thought and offers advantages
here is well. Finally, if studied occasionally as opposed to becoming a
religion, it can refresh ones own identity with confidence and new ideas. In
this regard I recommend, “The Philosophy Book, Big Ideas Simply
Explained,” a compilation of most philosophies in the world for browsing