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Algorithms, Algorithms, and MORE Algorithms!

April 17, 2013

Our markets have changed dramatically from the days of the open outcry system…where floor traders created our prices. Today, most of our markets (stocks, bonds, commodities, currencies, and derivatives) are electronic markets. These virtual markets are driven by our high-speed computers (HFT) and by mathematical ALGORITHMS. Practically all of our PRICES are now determined within our VIRTUAL computer screens (and Algorithms play a significant role). Even our Fed’s Trading Desk, Citigroup, J.P. Morgan Chase, Wells Fargo, and Bank of America use Algorithms when trading in the markets. Algorithms have become ubiquitous and real brokers and traders are taking a back seat to our ubiquitous computer MACHINES.

We now use Algorithms for most of our APPS which we download to our Mobile Phones. Google and Facebook are using Algorithms for much of their Search strategies. Medicine is now using Algorithms for analyzing various treatments and for diagnosing diseases. Weather forecasting is using Algorithms for analyzing weather trends and conditions. Our Military uses Algorithms for sensor systems and other calculations and simulations.  Algorithms are very useful and beneficial for many tasks. I am thankful for all these new advances in our technology. But are Algorithms useful for monetary, economic, and financial purposes? What is the weakness of these tools within the profession of Economics? Why will they break down and become useless over time for monetary transactions?

The key (core) concept in Economics transcends matter and energy (that which math based formulae can be effective). Math is great for calculating objective phenomena (say the distance to the Moon or the time required to revolve around our Sun)…but Math is useless for determining the subjective VALUE that resides within the MINDS of human beings. What is the VALUE of GOLD in the mind of Bernanke? What is the VALUE of GOLD in the mind of a hard core Gold Bug? Would each person have a similar objective viewpoint? I don’t think so! Talk to your favorite Gold Newsletter Writer and then talk to a Central Banker. Why are they at complete logger heads over the VALUE of GOLD?

We know that gold is an objective item which is physical and composed of MATTER (inorganic matter). But is the concept of VALUE composed of MATTER? I don’t think so! VALUE is mental (internal) concept of one’s MIND. This means that VALUE is subjective and personal. Ben Bernanke’s subjective MIND is much different from your favorite GOLD BUG’S MIND. And VALUE is the fundamental concept of Economics  and Money. When I walk into Wal-Mart to shop I witness millions of physical items composed of matter which are FORSALE…yet each item is given a subjective PRICE or VALUE that changes from day-to-day. Why?

Within Economics and Money many assume that VALUE can be objectively measured or calculated. In reality, however, this concept is personal, mental, and subjective. VALUE can not be measured with Algorithms or Math (precisely or objectively). Every person has their own view of VALUE. Just ask your wife the next time you go shopping for household items. Ask a buyer who is shopping for a house? Ask an Art Collector who desires a particular painting for his gallery? Or ask your investor friend who desires Equities, Bonds, and Mortgages over Gold, Silver, or Oil? Algorithms can not measure VALUE meaningfully!

What does this mean for money and economics? I would suggest that all our Algorithmic Trading and HFT trading which assumes that asset VALUES can be measured objectively will discover otherwise in time. Algorithms are great for measuring and calculating that which is measurable (all that which is within our physical Universe). Algorithms, however, are mostly useless for determining subjective outcomes which are internal to a human being’s MIND (consciousness). Can an Algorithm determine objectively a woman’s BEAUTY? Can an Algorithm determine or measure HAPPINESS? Can an Algorithm measure my desire for SUCCESS (as a person)? Can an Algorithm measure MOTIVATION, DETERMINATION, or PURPOSE? I don’t think so!

In conclusion, I would suggest that Traders, Speculators, Investors, and Pundits need to recognize that our MARKETS have changed dramatically from prior periods. PRICES are now determined in a VIRTUAL environment (our computer screen) and not via the prior Open Outcry procedures (floor traders). Prices are now subjective and mostly MACHINE driven. The price of gold and silver is no exception! Supply and Demand will not always work to set PRICES given today’s VIRTUAL pricing reality. We should now think of our markets as VIRTUAL (not paper) and Digital (not printing of money units). This change in THINKING may be difficult for many (tradition is difficult to change).

Furthermore, the recent PRICE Suppression of gold and silver was most likely initiated via HFT and Algorithmic Trading. Here is one definition of an algorithm:   An Algorithm is the use of electronic platforms for entering trading orders with an algorithm which executes pre-programmed trading instructions whose variables may include timing, price, or quantity of the order, or in many cases initiating the order without human intervention. Algorithmic trading is widely used by investment bankspension fundsmutual funds, and other buy-side (investor-driven) institutional traders, to divide large trades into several smaller trades to manage market impact and risk.[1][2] Sell side traders, such as market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically. Price manipulation can also result from algorithmic trading!

Dr. Paul Craig Roberts has a website which you might want to visit. His recent article on the price suppression of gold provides clear evidence that this recent downward SPIKE in gold was not the result of Supply/Demand factors. You can read this article and make up your own opinion at: I fully agree with Dr. Roberts on this issue!  That is my missive for today! I am:

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