Truth in Numbers- Bad math as a propaganda and sales tool

It’s no surprise that the largest employer of mathematicians in the United States is the National Security Agency.  These jobs are not all ‘codebreakers’ – why does the NSA employ so many mathematicians, second only to Wall St.?

The biggest secret propaganda and sales tool used by experts in the modern world is the deliberate twisting and false presentation of data, specifically – numbers and ‘statistics.’  They do so in such a subtle way, that the argument leads into a heated debate about the inference of the obvious conclusions – NOT the calculation of the numbers themselves!  Very rarely are the methods of statistical calculations, data collection, formulations, and other operations ever questioned.

This is used by governments, to paint a picture they want, in the case of the military, to ‘sell war’ – as outlined eloquently by mathematician Nassim Taleb:

 When Pasquale Cirillo and I examined the historical accounts of wars for our statistical analysis of violence, we discovered huge holes –people take numbers for gospel, yet many accounts were fabrications. Many historians, political “scientists”, and others for fall for them, then get to write books. For instance we saw that the scientific entertainer Steven Pinker based his analysis of the severity of the An Lushan rebellion on a shoddy overestimation –the real numbers of casualties could to be lower by an order of magnitude. Much of Pinker’s thesis of drop in violence depends on the past being more violent; it thus gets further discredited (the thesis is shaky anyway as Pinker’s general assertions conflict with the statistical data he provides). Peter Frankopan, in his magesterial The Silk Roads, seem to get the point: estimations of casualties from the Mongol invasions were inflated as their accounts exaggerated the devastation they caused in order to intimidate opponents (war is not so much about killing as it is about bringing submission). Our main (technical) paper is here.  But it is not just the bullshitting of Steven Pinker: numbers for many wars seem to have been pulled out of a hat. Some journalist cites some person at a conference; it finds it way to Le Monde or the New York Times, and that number becomes fixed for future generations. For our attempt to build a rigorous method of quantitative historiography, we devised statistical robustness techniques: they consist in bootstraping “histories” from the past, considering the past a realization between the lowest and the highest estimate available, producing tens of thousands of such “historical paths” and evaluate how “robust” an estimator to changes in the aggregate. More depressingly, we found that no historian had bothered to do similar cleaning up work or robustness check –yet the statistical apparatus is there to help.

(In case you haven’t heard of Nassim Taleb this book is a MUST READ as a primer for any trader or investor to understand MATH as it pertains to the MARKETS:  Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets.  Taleb is no academic he runs a multi-billion dollar hedge fund).

Inflated numbers of enemy casualties, or deflated numbers of aggressor casualties, pose an obvious example of why such agencies would use bad math to display data in such a way as to further their argument, for one side or another.  But what other examples?  Why would Wall St. use such a strategy, considering their entire business is numbers?

Consider the example of the Fed and interest rate policy.  If the current interest rates are 1%, and the Fed hikes to 2%, that’s a 1% increase but in percentage terms, it’s a 100% increase!  If you had interest rate derivatives, you could with no leverage potentially earn a 100% return on your money, in a day (supposing it was a surprise and the market wasn’t already pricing in the hike).

Another popular statistical misconception, is that of loss recovery.  Recovering from a loss is not linear.  For example, if your fund has a 10% loss, you need 11.11% just to break even.  This becomes more extreme, the deeper the loss hole.  If you start with 100 units, lose 10% of them – you have 90.  But to increase from 90 back to your original starting 100, you need 11.11 units, which is 11% just to get back your lost 10 units.  Yes!

And speaking about performance, let’s knock the industry standard performance capsule and its big gaping hole.  According to most reporting standards, such as prescribed by NFA, FINRA, and many others – funds report monthly performance based on a ‘snapshot’ of performance during that month.  This sounds reasonable until you actually calculate monthly performance numbers and see that it’s really only performance based on a 1 or 2 day period intra-month.  If there was a big profit or a big loss on the days taken as ‘snapshots’ that’s what will show in the capsule.

What’s misleading about this, it doesn’t represent to investors what happened DURING the month.  For many strategies, this is not relevant – but for some strategies, it is very relevant.  For example, imagine a scenario where there was a huge 30% loss and then recovery, and the month ended up being 2% positive.  It would seem to be a low-volatility fund, and likely attract conservative investors, like Pension funds.  They wouldn’t know about the intra-month risk, unless the manager told them (but why would they, it’s not in the required documents, and maybe THEY don’t even know about it).

However you add it up, the difference between balance and equity can be misleading.  Skipping the monthly performance capsules that 99% of Wall St. uses, if one has access to it, one can compare the balance and equity curves over time.  For those who don’t know, balance is closed positions, equity includes live trades.  So if a position is still open, the floating profit or loss will show up in the equity.  Take a look at this discrepancy:

The red line is the balance, yellow/orange line is the equity.  These lines must separate when trades are placed, otherwise an account would never lose or gain.  But how wide are these gaps, how frequent are they?  Absent of rigorous statistical analysis as done by Taleb in his war casualties paper, comparing these 2 lines is the most basic form of drawdown analysis.  What caused the lines to diverge?  What dates did they diverge on, and what forces caused them to converge?  These are questions astute investors should be asking.

For a full education on statistical analysis, checkout Fortress Capital’s Introduction to Foreign Exchange.  For a pocket guide designed to make you a due diligence expert, checkout Splitting Pennies – Understanding Forex for only $6.11 on kindle, or get some awesome financial books here.

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Bitcoin and other cryptocurrencies flash-crashed Saturday night, one day after the US Commodity Future Trading Commission (CFTC) sent subpoenas four cryptocurrency exchanges in an ongoing probe into bitcoin manipulation that began in late July - following the launch of bitcoin futures on the CME, according to the Wall Street Journal
CME’s bitcoin futures derive their final value from prices at four bitcoin exchangesBitstamp, Coinbase, itBit and KrakenManipulative trading in those markets could skew the price of bitcoin futures that the government directly regulates.
In delay reaction, Bitcoin fell as much as $433 or 5.6% in Saturday night trading, with some noting that the flash crash happened shortly after a 90th ranked crypto exchange, Coinrail, had suffered a "cyber intrusion", and was likely the more relevant catalyst for the crypto price drop.
While major Cryptocurrencies were down from 4.5 - 5.5%, Bitcoin Cash dropped over 8.4%. 
The CTFC subpoenas were issued after several of the exchanges refused to voluntarily share trading data with the CME after being asked last December. Of note, the CFTC regulates the CTC. 
According to the WSJ, the CME, which launched bitcoin futures in December, asked the four exchanges to share reams of trading data after its first contract settled in January, people familiar with the matter said. But several of the exchanges declined to comply, arguing the request was intrusive. The exchanges ultimately provided some data, but only after CME limited its request to a few hours of activity, instead of a full day, and restricted to a few market participants, the people added.
What is curious, is that if there was indeed manipulation since the launch of bitcoin futures, it was to the downside, as the price of cryptos peaked around the time the crypto futures were launched, and are down well over 50% in the 6 months since.
Coinbase in particular has been under the watch government regulators. On February 23, Coinbase sent an official notice to around 13,000 customers to notify them they were legally required to turn over their information to the IRS
The IRS had initially asked Coinbase in July 2017 to hand over even more detailed information on every one of its then over 500,000 users in an attempt catch those cheating on their taxes. However, another court order in Nov. 2017 reduced this number to around 14,000 “high-transacting” users, which the platform now reports as 13,000, in what Coinbase calls a “partial, but still significant, victory for Coinbase and its customers.”
Coinbase told the around 13,000 affected customers that the company would be providing their taxpayer ID, name, birth date, address, and historical transaction records from 2013-2015 to the IRS within 21 days. Coinbase’s letter to these customers encourages them “to seek legal advice from an attorney promptly” if they have any questions. Their website also states that concerns may also be addressed on Coinbase’s Taxes FAQ. The ongoing legal battle between Coinbase and the US government dates back to November, 2016, when the IRS filed a “John Doe summons” in the United States District Court for the Northern District of California.
On Feb. 13, personal finance service Credit Karma released data showing that only 0.04 percent of their customers had reported cryptocurrencies on their federal tax returns. 
And in April, former New York Attorney General, Eric "we could rarely have sex without him beating me" Schneiderman, launched a probe of 13 major cryptocurrency exchanges according to the Wall Street Journal - claiming that investors dealing in the fast-growing markets often don’t have the basic facts needed to protect themselves.
Former AG Schneiderman’s office said the program, called Virtual Markets Integrity Initiative,  is part of its responsibility to protect consumers and ensure the integrity of financial markets, and its goal is to ensure that investors can have a better understanding of the risks and protections afforded them on these sites.
CFTC Commissioner: Crypto is a "modern miracle"
While the CFTC, IRS and New York Attorney General's office are all cracking down on cryptocurrency exchanges, it seems to all be part of the government's embrace of virtual currencies.  Last week CFTC Commissioner Rostin Benham called cryptocurrencies a "modern miracleat the Blockchain For Impact Summit held at the UN in New York last week. 
But virtual currencies may – will – become part of the economic practices of any country, anywhere.  Let me repeat that:  these currencies are not going away and they will proliferate to every economy and every part of the planet.  Some places, small economies, may become dependent on virtual assets for survival.  And, these currencies will be outside traditional monetary intermediaries, like government, banks, investors, ministries, or international organizations.
We are witnessing a technological revolution.  Perhaps we are witnessing a modern miracle. -Rostin Benham
Rostin hinted at the upcoming legal action against the exchanges during his speech:
Under the CEA and Commission regulations and related guidance, exchanges have the responsibility to ensure that their Bitcoin futures products and their cash-settlement process are not readily susceptible to manipulation and the entity has sufficient capital to protect itself.  The CFTC has the authority to ensure compliance. In addition, the CFTC has legal authority over virtual currency derivatives in support of anti-fraud and manipulation including enforcement authority in the underlying markets.

Meanwhile, the official Bitcoin website removed references to Coinbase, Blockchain.com and Bitpay, according to Crypto News - only one of which, Coinbase, was subpoenaed. 
http://Bitcoin.org  just removed/censored the 2 largest US Bitcoin companies (@BitPay Payment processing and @coinbase Bitcoin Exchange). It’s a good move: Bitcoin Core is obviously no longer Bitcoin, and should ideally be removed from both @BitPay and @coinbase too.

The CFTC officially recognized bitcoin as a commodity in September of 2015 when it went after Coinflip for operating a platform for trading bitcoin options without the proper authorization. Since the agency effectively asserted its dominance over the bitcoin market with that decision, this is the first time it has given its blessing to an bitcoin options trading platform. Expect a burst of institutional trading activity to follow - especially since they approved institutional options trading in July
This post sponsored by Total Cryptos @ www.totalcryptos.com  

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