Truth and science
16 Oct, 2020 at 17:15 | Posted in Economics | 10 Comments
In my view, scientific theories are not to be considered ‘true’ or ‘false.’ In constructing such a theory, we are not trying to get at the truth, or even to approximate to it: rather, we are trying to organize our thoughts and observations in a useful manner.
What a handy view of science.
How reassuring for all of you who have always thought that believing in the tooth fairy make you understand what happens to kids’ teeth. Now a ‘Nobel prize’ winning economist tells you that if there are such things as tooth fairies or not doesn’t really matter. Scientific theories are not about what is true or false, but whether ‘they enable us to organize and understand our observations’ …
Mirabile dictu!
What Aumann and other defenders of scientific storytelling ‘forgets’ is that potential explanatory power achieved in thought experimental models is not enough for attaining real explanations. Model explanations are at best conjectures, and whether they do or do not explain things in the real world is something we have to test. To just believe that you understand or explain things better with thought experiments is not enough. Without a warranted export certificate to the real world, model explanations are pretty worthless. Proving things in models is not enough. Truth is an important concept in real science.
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LARS P. SYLL 
Henry asked for evidence of JPM’s trading revenue. The 2019 Annual Report is here: https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/investor-relations/documents/annualreport-2019.pdf
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“Total Markets revenue of $20.9 billion, up 7%” in 2019. The previous cnbc link I supplied in an earlier post said revenue has increased in 2020, $9.7 billion in the second quarter alone.
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“Markets revenue” is mainly principal trades. From the annual report, page 69:
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“Principal transactions revenue includes amounts recognized upon executing new transactions with market participants, as well as “inventory related revenue”, which is revenue recognized from gains and losses on derivatives and other instruments that the Firm has been holding in anticipation of, or in response to, client demand, and changes in the fair value of instruments used by the Firm to actively manage the risk exposure arising from such inventory. Principal transactions revenue recognized upon executing new transactions with market participants is driven by many factors […] the predominant source of principal transactions revenue was the amount recognized upon executing new transactions.”
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They are doing a lot of trading, this year should be at least $30-40 billion in revenue.
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Several Nobels a year for their traders.
Comment by rsm— 22 Oct, 2020 #
“Model explanations are at best conjectures, and whether they do or do not explain things in the real world is something we have to test.”
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JP Morgan’s models are tested by their Profit and Loss.
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JP Morgan’s models explicitly include the Fed: one model predicts that front-running the Fed will be profitable. And their Profit and Loss proves it.
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Economic models today must include an exogenous rich uncle standing beside the biggest players in markets, ready to print free money to keep them going …
Comment by rsmo— 17 Oct, 2020 #
Robert,
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“JP Morgan’s models are tested by their Profit and Loss.”
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Tested on paper or in the markets?
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“Economic models today must include an exogenous rich uncle standing beside the biggest players in markets…”
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So society bails out the big players only?
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Why restrict avuncular central bank support to financial markets? Why not do it for all risk markets? Currencies? Horse racing? Lotteries?
Comment by Henry Rech— 17 Oct, 2020 #
Tested in markets, of course. “Trading revenue surged 79% to a record $9.7 billion as bond and equities trading exceeded expectations.” From https://www.cnbc.com/2020/07/14/jpmorgan-chase-jpm-earnings-q2-2020.html
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And yes, the Fed can support any market. A lot of JPM’s trading profits probably came from front-running the Fed’s purchases. I think zerohedge reported on a confidential JPM research report that recommended this strategy, based on a model that explicitly includes a rich Uncle Sam. Corporate bonds were distressed but the Fed started buying them and their price firmed. JPM traders bought after the Fed’s announcement of their intent to buy corporate bonds, and before implementation. Model said Fed will increase private bond prices, and it did.
Comment by rsm— 18 Oct, 2020 #
Are these earnings from as principal trading or from broking?
Comment by Henry Rech— 18 Oct, 2020 #
Henry, see https://finance.yahoo.com/news/inside-jpmorgan-trading-desk-u-080014057.html for an idea of what goes on at JPM’s trading desk. A couple years ago when a JPM-owned ship was caught with cocaine cargo, twitter traders were saying JPM was just cutting out the middleman, shipping the drugs right to their trading floor. JPM traders are doing whatever they want.
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A couple more points about your earlier post:
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Currency is implicitly backstopped by the unlimited mutual currency swap lines between central banks. The dollar would have appreciated much more against the Euro after 2008 if the ECB had not been able to get as many dollars as they needed.
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Horse racing can be securitized. The track sells a bond, the Fed buys the bond or an Exchange-Traded Fund containing the bond, and the horse racing market is supported. (Horse racing is terrible and should not be supported but the Fed can easily do it if it likes.)
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Lotteries can be supported by buying instruments too. The Fed’s new Municipal Liquidity Facility will buy your IOUs based on lotteries and roll them indefinitely …
Comment by rsm— 21 Oct, 2020 #
Let the Fed bail out Black Jack and Poker fiends. May as well.
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Your post does not address my question.
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Comment by Henry Rech— 22 Oct, 2020 #
I thought it was obvious: JPM does principal trading. It also has brokering services.
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Screenshots of confidential JPM reports I’ve seen on twitter and zerohedge.com show recommended trades for their traders, and discuss previous recommendations and their outcomes. They have mathematical models that explicitly include free, exogenous money, representing new reserves created from thin air. Their trading desk uses these models.
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JPM reports about $30-40 billion a year in trading profits. That’s 30 or 40 thousand Nobel Prizes. If JPM hired 30000 traders, each could earn the monetary reward of a Nobel.
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Economists are clueless …
Comment by rsm— 22 Oct, 2020 #
“JPM reports about $30-40 billion a year in trading profits”
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Please supply evidence.
Comment by Henry Rech— 22 Oct, 2020 #
Robert,
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“…an idea of what goes on at JPM’s trading desk”
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This sort of behaviour is rife as I have attempted to tell you several times. These large banks and broking houses can manipulate markets. They have been even known to work in cahoots with institutions (their clients). So I am always skeptical when you start talking about a firm’s profit successes. Then of course there is inside trading behaviour. My advice to you is to stop reading the the bullshit these firms publish.
Comment by Herny Rech— 22 Oct, 2020 #