Contrary to popular belief, money is no material good. It is created out of nothing by banks lending it. Therefore, for each newly created lot of money there’s the same amount of debt. You’re destroying the money by repaying your credits. Since this requires a higher sum due to interest and compound interest, and since money is also permanently withdrawn from circulation by hoarding, the entire money supply must constantly grow. It must never shrink. If it still does, as in the 1930 economic crisis, loan defaults, bank crashes and bankruptcies are the result. The monetary system is therefore a classic Ponzi scheme.
Because the money amount always corresponds to the same amount of private and public debt, this debt amount also must inevitably grow, in spite of all the political lamentoes. Reducing public debt would either destroy money or increase private debt proportionately. This happened in fact in the United States around the turn of the millennium, when then-President Bill Clinton managed to get by without borrowing, and even achieved a budget surplus. Which caused interests to drop and banks to look elsewhere for distributing their money. The indirect result of Clinton’s good deed was a massive increase in private debt that eventually led to the mortgage crash of 2007.
How to acquire it in large amounts
Money is considered a good thing in almost all cultures. After all, it allows you to do the things you want, and – even more important – not to do things you don’t want to do. It thus represents freedom. You can get to it with different methods. The most obvious is taking away other people’s money. Here’s the Top Ten fortunes by known villains, according to Forbes (in US $):
- Hugo Drax – 7.6 billion
- Auric Goldfinger – 6.5 billion
- Max Zorin – 5.3 billion
- Lex Luthor – 4.7 billion
- Franz Sanchez – 1 billion
- Ernst Stavro Blofeld – 640 million
- Karl Stromberg – 640 million
- Elektra King – 420 million
- Francisco Scaramanga – 115 million
- Dr. Julius No – 110 million
But the most successful in money taking are not, as you might think, drug cartel bosses or leaders of criminal underground organizations, but presidents and other heads of state. They can take their share of money with no risk, since they need not fear the law. Here’s the Top Ten of the acquired fortunes by this way (in US $):
- Muammar Gaddafi, Libya – 55 billion
- Hosni Mubarak, Egypt – 50 billion
- Mohamed Suharto, Indonesia – 25 billion
- Alexander Lukashenko, Belarus – 12 billion
- Mobutu Sese Seko, Congo – 7 billion
- Ben Ali, Tunisia – 4 billion
- Gnassingbé Eyadéma, Togo – 4 billion
- Obiang Nguema, Equatorial Guinea – 3 billion
- Slobodan Milosevic, Serbia – 1 billion
- ‘Baby Doc’ Duvalier, Haiti – 600 million
This list does naturally not include assets of monarchs such as the Sultan of Brunei, who have no need of pilfering because the country belongs to them by law anyway. Or of dictators like Wladimir Putin, whose estimated 125 billion booty (plus a 17,000 sqft palace) officially does not belong to them, but is kept for them by friendly oligarchs. The listed sums must also be considered in relation to the economy of the country. To bag 600 million in grinding poor Haiti is a much more impressive performance than the lousy one billion that Milosevic could siphon off in industrialized Serbia. But as long as you’re neither a supervillain, nor a head of state, nor both at the same time, you have no choice but to use other means to acquire money. There’s also the method of buying something cheap and selling it dear. Not as profitable as being a head of state, but it still can produce some handsome gains (annual income in US $):
- Jim Simons, Renaissance – 1.7 billion
- Ken Griffin, Citadel – 1.7 billion
- Raymond Dalio, Bridgewater – 1.4 billion
- David Tepper, Apaloosa – 1.4 billion
- Izzy Englander, Millenium – 1.1 billion
- David Shaw, Shaw Group – 750 million
- John Overdeck, Two Sigma – 500 million
- David Siegel, Two Sigma – 500 million
- Andreas Halvorsen, Viking – 370 million
- Joseph Edelman, Perceptive – 300 million
All in this list acquired their wealth with algorithmic trading. Which is the topic of most of the rest of this blog. It does not produce any goods. But on the other hand, it does not steal from anyone. On the contrary, private, small-scale financial trading can boost demand and soften economic inequality. It can redistribute money from the rich to the poor. So it should be rewarded by the government, for instance by a tax exemption. Well, one can dream, at least…
Why financial hacking?
Part of my job is developing financial tools and trading systems for clients. So far we coded hundreds of trading strategies with all sorts of algorithms for all sorts of financial instruments. Some worked and fulfilled the client’s expectations. Some failed miserably. And some worked in the backtest, but not in live trading. Coming from a background of theoretical physics and computer game programming, I wondered why trading seems not to be an exact science at all. What is the difference between a successful and a doomed strategy? And how can you determine that before actually trading it?
On this blog I’ll attempt a hacking approach to algorithmic trading. Hacking is nothing illegal, it’s just a pragmatic way to solve problems. Hackers prefer experiment over theory. They don’t give a damn about the wisdom of gurus or authorities. So I’ll start with considering all praised trade systems worthless and all “trader’s wisdom” irrational and nonsense until proven otherwise. I will try to evaluate by systematic experimenting whether, why, when, and how algorithmic trading does work. My goal is to find out how it can be a reliable income source for a private trader. This might require complex statistical or machine learning algorithms – but that’s no big deal with today’s software tools. All scripts and software to the articles will be put up for download, so anyone interested can reproduce all the results and use the strategies. After all, successful private trading is for the common good.
As this blog is about algorithmic trading, I’m going to post here a lot of algorithms and source code. Naturally not any trader is able to read code. On the other hand, some basic code and math understanding is required for making sense of the articles. To go from zero to a full understanding of the articles on this blog, here’s a list of Useful Books.
24 thoughts on “Money and How to Get It”
Love it! Also, love that you are using Zorro and the approach to challenging everything through experimentation.
Great article! Thanks for sharing. Keeps following your works !
JCL, I met his blog yesterday, while researching on the Aronson’s software TSSB. Then I learned about “Zorro Project”. Immediately, I started reading the series “Build Better Strategies” and reading about Zorro. All this set of materials and ideas was what I was looking for some time. I hope to get the most out of this great project and contribute to its development. Thank you very much.
Thank you, Johann. I met your blog this week. Zorro seems really interesting and I like your point of view about trading. Regards.
Most of these are fiction caracters isn’t? Or did criminals fond in love with films…?
Hugo Drax – 7.6 billion
Auric Goldfinger – 6.5 billion
Max Zorin – 5.3 billion
Elliot Carver – 3.9 billion
Franz Sanchez – 1 billion
Ernst Stavro Blofeld – 640 million
Karl Stromberg – 640 million
Elektra King – 420 million
Francisco Scaramanga – 115 million
Dr. No – 110 million
No, they’re all real criminals. You can even find them on Wikipedia: https://en.wikipedia.org/wiki/007 . Fortunately they’re all dead now.
The net worths are off for the trading guys.
Simons for example worth 18bn
That’s right. I got the list also from Forbes, but I guess it was the annual income, not the accumulated wealth. I’ll correct that. Thanks for the info!
Ken from Shanghai, China.
I am inspired by this block for the mindset change, I am willing to learn more and sharpen my skills for this interesting idea – algorithmic trading
But as long as you’re neither a supervillain, nor a head of state, nor both at the same time, you have no choice but to use other means to acquire money.
experiment over theory
I think, rather I know – these 2 lines are to become my philosophy.
Hey do you have a twitter channel aswell to follow your blog?
No, sadly I’m lacking the time to update a twitter channel.
I like your blog
Just joined Zorro, glad to see your background is physics 😉
I loved your blog. You think like me. I also have a physics background. Why physicists always end up into these shady things?
I also want to clone/reverse-engineer Zorro for my personal use in future. :]
Greetings, from Brazil.
Everything before “Why financial hacking?” seems a little strange compared to the rest of the pages on the blog. I’ve read 25 or more pages on this blog and I really like your approach to trading, trading systems, the financial markets, and all related issues. I think that there is an honesty in what you post that is missing from most trading/financial / stock market blogs. I’ve only seen one other blog that I felt was as honest and corresponded to the real world as much as yours does. I’ll not say the name of the other site, because I think it would be in bad taste to promote another site here, but the abbreviation for the other site is PAL.
The initial parts of this article contains some truth, but they seem like an attempt to sound like a philosopher or writer of prose. As an example, I don’t have a degree in economics, but it seems to me that money exists outside the money created by banks. As an example, historically gold and salt served as currency and neither was created by banks. Fractional reserve banking certainly increases the money supply but it’s not responsible for all of it. Even today, many things besides money act ax proxies for money.
Further, the debt did not get reduced during the Clinton administration when you consider all the off the books debt such as social security and lots of other off the books debt that the government has. Although this might have been a factor in the later financial crises, to claim that this was the cause of them seems to lack the scientific rigor that you show throughout the rest of the blog.
Notwithstanding my criticism of this particular blog entry, I think that your blog is amazing and I intend to read almost every entry on the blog.
Thank you. I think before the existence of banks, some local sovereign took that part, by creating money through minting or determining an excess value to currency tokens, like cowry shells or stone disks. That, also, involved a lending process. I also think gold and salt were trading goods, no currency. But you’re right with your remark about the Clinton administration – there have been a lot more causes to the later financial crisis than their money handling.
Can u lend me $500,000 – I’ll pay you back sometime – honest !
Got your Black Book – First edition I think.
Lending you $500k? No problem. You only need to pay $45678.90 handling fee and I’ll send the money. Honest!
Your writing my friend is an intellectual joy to read both in style and content. I have spent the past few days devouring article after article and have yet to be disappointed. As this is the beginnings of my journey with algorithmic trading I am grateful to have come across such quality content early on. Well thought out, and without (obvious) ulterior motives. You are an inspiration. Many praises.
I love this blog for its honesty and its utility for private traders!!!
One subject I would love to get your read on is the growing crisis of retirement for the working folks.
In the pre-WWII days it was expected that you would work until you drop dead although in asian cultures the older generation would be taken care of by the younger generation. Then in the West, the retirement dream was sold by the financial planning and brokerage system as a goal in part to extract monies for their various products. Now through incompetent government policies (e.g., negative interest rates) and the inherent conflict of interest of the financial planning industry a harsher reality is being realized unfortunately.
That’s right, interest rates or life insurance policies won’t work well anymore for retirement. If I retired, I would use some stock or ETF portfolio that only needs to be rotated once a month.
Looking forward to purchasing, reading, and perhaps implementing(with a few minor changes…lol) some of the algo’s; I’ve been an amateur studying algo’s for some time, but like this approach and am rather IMPRESSED with Zorro as a tool…heck, being able to do C-like programming is not a bad thing either! MANY THANKS for your work!