Sunday, 13 February 2011

High protein brain food with a side order of offal

I have been reading 'Why We Get Fat' by Gary Taubes.  I like the way this author writes and came away with a positive feeling about the book.  He delivers his message in three servings - first he debunks the so-called 'calories in/calories out' model of popular and official lore.  The author lays out a decent set of easily understandable counter-examples to the generally held belief that we embody a linear relationship between how much we eat and how much we weigh.  Things are not that simple, he correctly tells us.  Next, he gives us the highlight of the book - a decent primer on lipid metabolism and particularly how it interacts with our dietary habits.  His descriptions of what could have been utterly dull descriptions of metabolic pathways are impeccably clear and certainly convincing with respect to the insidious role of insulin in the fattening of the modern world.  His final chapters deal with some dietary advice, which to all intents and purposes, corresponds to the Atkins diet.

He fails to give us a feel for just how difficult it is to stay on the Atkins diet for most people.  This contrasts with his criticism of many other kinds of diet and current established dietary advice, which clearly highlights the difficulty people really find in following dietary and exercise advice.  It has left me pondering over the fact that people generally struggle to manage their diets, regardless of who's story you believe.

Taubes also doesn't address the downside risks of Atkins as rigorously as he does rival diets (ones based on less firm scientific foundations).  I think the book would have been better without part 3, though to be fair he doesn't overdo the dietary advice.  The science of lipid metabolism does indeed lend support to recent low carbohydrate dietary regimes but cannot make those prescriptions any more palatable.  

Extraordinary as it sounds, the main message - that our current high levels of carbohydrate consumption, rather than greed and sloth exclusively, are causing us to get fatter - is one whose consequences, if true, would be so far-reaching vis-a-vis our eating habits as to be out of reach.  Also, I wonder if we all really did fall quite so completely for the straw man 'calories in/calories out' story of the 60s and 70s that he caricatures in his book, especially when we consider how our culture has spent the last 80 years or so developing seemingly endless dietary permutations.  Perhaps somewhere deep in our own guts we knew there were fattening foods and non-fattening foods?  Indeed, chapter 16 is meant to be a historical digression showing how we have known about the fattening properties of carbohydrate foods for a couple of hundred years.  Is it really likely that culturally we abandoned all of this as soon as 1960s nutritionists told us to?  How obedient we all must seem to be to Taubes when it comes to official advice on diet.  That sounds quite implausible to me.  I would have liked to hear a more sociological history of how this interesting moment of counter-culture, where independence and freedom from stale convention began to take root in the Western public's consciousness happened also to be the moment where we all decided to abandon the folk knowledge we shared about fattening foods in favour of advice to control and restrict our diet.  Perhaps the religions tradition of saintly starvation played a role?

At several points in the book he comes close to implicitly agreeing with the calories in /calories out formulation and surely he has overdone his criticism of the benefits we might achieve by taking our noses out of the trough and doing some hard work.

One last criticism, there's a really quite ludicrous chapter - "The significance of twenty calories a day" - in which he presents for serious consideration an argument against calories in/out as follows.  To go from a lithe teenager to an obese 50-something, you'd need, on average, to consume an extra (i.e. paltry) 20 calories per day, and our bodies are just not designed to control our calorific balance to such a fine degree.  This Science journalist has clearly forgotten the difference between mean and variance.

My money's on a multi-modal explanation of why we're now facing a growing problem of obesity but having read this book, it is now clearer to me just how central a role metabolic pathways play.  You should read his book if you currently don't believe metabolic processes play a significant role in the overall story of the rise of obesity in the late 20th century, but don't expect metabolic processes to be the only major causal factor.

Saturday, 5 February 2011

The fundamentalist trend-follower's bible

What kind of cynical marketer calls a book "Trend Following - Learn how to make millions in up or down markets"?  There's even a helpful tagline: "The strategy that made millions in the 2008 Market Crash" (their emphasis).  Michael W. Covel, apparently.  I'll make a number of generous assumptions and follow through their consequences.  First, let's assume that the strategy of trend following which materially is the subject matter of his book can, either through individual endeavour, or through investing in the right trend following investment manager, produce annualised returns of 100%.

Second, let us focus on 2008, as the tagline invites us to do.  If a strategy made millions, let us conservatively assume it to be two million (USD assumed) that year.  So, we have a strategy which we generously allocated 100% returns to, and which made a two million dollars in profit.  In order for that to have happened, the adventurous reader must have risked two million dollars of their own money.  Yet clearly this cynical marketing ploy isn't aimed at the world of high net worth investors, but the interested investing public.  They will not have anywhere near two million dollars to invest, so the disingenuous exhortation is mostly exploitative hyperbolic marketing. Assumed daily compounding would bring the initial deposit required down somewhat, but you get the point I hope.

Finally, the book spends some time justifying, contextualising and exonerating the reality of large draw downs in the records of that set of trend followers which Covel has been able to cosy up to.  He claims that achieved return itself rather than volatility adjusted returns (Sharpe ratio) are a more appropriate measure for trend following funds.  Leaving aside the fact that I think this is a dangerous selection to be promulgating to the investing public, even on its own terms it argues against having such a deceptive "made millions in 2008" tagline on the front cover - for even if his argument is right that one shouldn't look at one big losing percent return in any one year, surely to avoid the accusation of self-interested inconsistency, he should not pick any one year of positive returns and booster them so shamelessly. 

I decided to buy this book and read it.  My conclusion is Covel is a fundamentalist trend-follower.  The phrase sounds like an oxymoron, since so often trend-following is pitched against a fundamentals based approach to investing (whether that be analysis of commodity supply and demand effects, analysis of the capital structure and balance sheet of firms or macroeconomic  analysis).  By fundamentalism I mean a kind of quasi-religious blind faith in an approach which accompanies an almost evangelical re-description of investment reality in terms of them and us.  Them being anyone who thinks they can make investment or trading decisions that use a valuation model based on anything other than price action.  Us being those who rely on price action only.

You'll find in this book a kind of anti-intellectualism shared by many blind-faith religious people.  Historically, the branch of finance which tried to bring intellectual rigour to the examination of market prices arguably started with Bachelier in 1900.  To be sure, before this was a series of practices and assumptions aimed at applying rules of thumb to trading. Examining only price action (including volume and open interest, where appropriate) is clearly a kind of primitive attempt.  The analogy I think of is in trying to explain the movement of oceanic water.  Examining nothing other that the surface phenomena of price action is analogous to looking at surface wave movements only - where the wind explains some part of the movement.  Now what might really be moving bodies of water requires a fundamental model - for example, how gravity, the moon, ocean floor structure, temperature might explain the movement of oceanic water mass.  This isn't to say that the wind explanation is subsequently wrong, rather it is incomplete.  It is an open question whether finance is at a stage where the fundamental models hold up well to our reality - for example the efficient markets hypothesis (EMH), which largely looks to debunk some of the 'price action' approaches, has come in for some recent well aimed criticism.

It could be argued that the EMH tried to sweep away many theories of price action with a single factor (beta, in the pure formulation) or multiple factors (in the later Fama French formulation).  Set against the academic position is some evidence of consistent, long-lasting out-performance of some price action funds (in particular, that subset which relies on so-called momentum effects - the eponymous trend followers of the Covel book).

Rather than impartially presenting the evidence, Covel instead, like any good evangelical sectarian blind-faither, pitches the story as one of competition between two mutually incompatible doctrines.  He, and a fair few trend following investment managers, make a virtue of the 'know nothing' approach they espouse (you could call the approach 'phenomenological' instead if the spirit of charity overwhelmed you).  They mock the fundamentals failures and lay claim to be the direct beneficiaries of the many failures of fundamentals based investing.  None of this is necessary.  Both approaches can coexist, and perhaps should.  He does a great disservice to the science behind the momentum effect with his empty rhetoric.  To borrow a term from Comte's classification of the stages of science, he's degraded the science of the momentum effect into a kind of metaphysics.

Thursday, 3 February 2011

The starving and inattentive panda

The rules of thumb which, good or bad, became embedded in the discipline of macroeconomics evolved during a period when most of the exemplars of economic growth shared many common features.  These structural relationships had become buried in the models.  Recent history has been unveiling them.

During the industrial revolution, as each of the developed world countries generated more economic growth at a national level, they also generated growth on a per capita basis.  In other words the average person found their income and wealth rise as the country itself found its relative position rising.  This has implications for the set of policy options open to that country.

When a country finally reached the 'big table' in terms of economic clout, then a certain set of assumptions are implicitly brought into play about what that country can afford to do to pay for its place - in terms of constraints on its fiscal policy, monetary policy, currency policy, growth policy.  However this policy consensus assumes implicitly a certain relationship between economic growth and population growth.  

But China stepped out of economic growth for the guts of half a century and, even though it tried to do the same for its population growth, it didn't achieve that.  The net result is a rich country which deserves a place at the top table, but one where the average citizen - and there are many of them -  is really quite poor relatively and absolutely speaking.  Policy makers ought to realise that with China, the GDP-to-Population growth relationship is quite different and that the usual constraints one once observed on a 'top table' economy may not be associated with the same degree of policy flexibility in the same way as it had done for many other growing national economies.

This point is strictly economic in scope, and has no bearing on the repugnancy of the political regime currently in power.