At the recent Republican debate held at the Reagan library, I found it hard to swallow the phoniness.

A fake video followed by fake outrage! Carly Fiorina gave a diva performance. Clenched teeth, seething rage, talk of butchered babies, body parts sold to Frankenstein labs for blood money. The image was one of a coven of Planned Parenthood witches with baby blood dripping from their fangs sucking at the Obama-supplied teet of government money… a horrific culture of death and big government that Carly will squelch like a cockroach. Man, she is impressive, if you ignore the content and concentrate on just the atmospherics.

So what’s the truth? Are abortions in America a run away epidemic? Are organizations like Planned Parenthood, motivated by gain and a liberal (meaning immoral) mindset, adding to the epidemic?

Let’s take a look at abortions in America.

The simple fact is *that you reduce abortions by reducing unwanted pregnancies*, specially among unmarried teens and underprivileged young women. Planned Parenthood and many other subsidized organizations spend a bulk of their effort in preventing unwanted pregnancies – through advice, free contraception and a presentation of options to young women. And how have they done?

Here’s a chart showing the U. S. abortion rate since 1980. (Data from Guttmacher Institute)

After 1990 the abortion rate has steadily come down from approximately 1.6 million abortions per year to about 1.0 million in 2012, which is the date where the latest figures are available (the red dot in the above diagram). It’s projected to be even lower today at less than 900,000. A large part of the gain has occurred under the Obama and Clinton administrations although the decline has been steady for 25 years. This data is from the Guttmacher Institute which collects detailed statistics on women’s health issues.

The decline is a direct result of reducing unwanted pregnancies – teenage pregnancies are down by 40% in the US in the last 7 years. That’s how you reduce abortions – not by criminalizing it, or taking away reproduction-based counseling provided by organizations like Planned Parenthood.

What would be an ideal goal for America?

*Zero abortions*.

But not because it is illegal or difficult to have one.

Zero abortions, because we have young women in charge of their lives, supported by community, counseled on their options, and completing their educations, instead of having to drop out to be single mothers. There are far too many young women in this country that face very difficult choices – poverty, broken homes, alcoholism in the family, hopelessness and community indifference. For such women Planned Parenthood provides education, support and options such as contraception, adoption and unfortunately even abortions.

By insisting that we should shut down public resources for Planned Parenthood we will not achieve the goal of zero abortions, we will do the opposite.

So, Carly, what do you say – let’s double the support for organizations like Planned Parenthood and accelerate our journey to Zero Abortions?

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Take Mersenne numbers. They are named after the 17th century French monk who studied them and are of the form: 2^n – 1, or 2 raised to the power n for some positive integer n, minus 1. The first few are: 1, 3, 7, 15, 31, 63, 127, 255 …. Since 4 out of the above 7 (not counting the number 1, which is outside the realm of numbers eligible to be prime) are prime, Mersenne thought that this series would be a rich source of prime numbers. He conjectured that an infinite number of these numbers would be prime – something that may be true but hasn’t been proven yet.

But the Mersenne series does yield some interesting properties. First, the exponent of 2 (i. e. the power to which 2 must be raised in a Mersenne number) must itself be prime! And even then very few prime exponents actually result in a Mersenne prime. Even so, last year, the largest prime currently known to man. a Mersenne prime, was found using fast computer searching. It is the 48th Mersenne prime and has more than 17 million digits!

Mersenne numbers are also an example of an area of mathematics called *Dynamical Sequences*. Here you generate numbers, starting with a seed, such as zero and repeatedly plugging into a simple algebraic expression. For example you can generate the Mersenne numbers by using the expression 2x+1. Start by plugging x=0 and the expression calculates out 1. Now plug 1 into the expression and you get 3. Repeat and you get 7 followed by 15, 31, 63, 127 … i. e. the Mersenne numbers.

Holly Krieger, currently at MSRI* (see below) in Berkeley, is studying the arithmetic properties of some magical dynamical sequences and coming up with mind blowing results! MSRI has a video series at the website Numberphile.com full of fascinating math games, puzzles, tricks and number facts. To see a wonderful show on her dynamical sequences and how prime numbers crop up everywhere see her presentation by clicking her picture below. Do see it all the way to the end for she has an unexpected surprise!

*MSRI – Mathematical Sciences Research Institute, Berkeley. Website here. MSRI is an advanced institute located in the Berkeley hills dedicated to the advancement of fundamental math and also to the cultivation of its beauty, power and importance.

I have the privilege to support some of their activities and in return get a rich exposure to fun math people and cutting edge researchers in the field. Next time you’re in Berkeley check them out. Ashok

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One of the attendees, Sean Hennessee, brought along a book for me, *Prime Obsession*, by John Derbyshire. As it says on the subtitle of the book, it’s about: *Bernhard Riemann and the Greatest Unsolved Problem in Mathematics*.

It’s amazing how much fun Math books like this can be – you really don’t even need to be a very deep scholar to love them, although it helps to be curious about the subject. I remember reading *One, Two Three.. Infinity* by George Gamow many years ago – a book that got me started loving all the math lore and magic.

Another fun book that I read many, many years ago is, *A Mathematician’s Apology* by G. H. Hardy, the celebrated Trinity College (Cambridge) don who discovered S. Ramanujan. He describes his own life as a mathematician elegantly and walks us through the corridors of Trinity College where the likes of Bertrand Russell, John Maynard Keynes, John Edensor Littlewood, James Clark Maxwell were doing world-changing science and where Ramanujan spent several years, a complete social misfit but a huge natural genius that everyone at Cambridge tried to adopt and understand.

There are many fun stories about Hardy and other prominent Mathematicians (Gauss, Euler etc.) in Derbyshire’s book along with an exploration of their genius and passion for math. The “Unsolved Problem” that the book talks about is *The Riemann Hypothesis*, one of 7 so called Millennial problems in Mathematics that has a $1,000,000 prize for its proof. It is the most talked about enigma that the math community incessantly talks of and is indeed a problem with a lot of astonishing twists and turns, all brought out very nicely in this book.

Here’s a fun story about G. H. Hardy from this book, which illustrates his interests and mindset. In a postcard to a friend around 1920 he talked about his six most cherished New Year’s Wishes:

1. Prove the Riemann Hypothesis.

2. Make 211 not out in the fourth innings of the last Test Match at the Oval in London.

3. Find an argument for the non-existence of God which shall conc=vince the general public

4. Be the first man at the top of Mt. Everest.

5. Be proclaimed the first president of the USSR, of Great Britain and Germany!

6. Murder Mussolini

Isn’t that a fantastic list! Wouldn’t you just love to chat with a genius who had that kind of New Year’s wish list?

What would be *your* six most cherished wishes?

In my next blog my New Year’s wishes (It’s New Year’s day tomorrow by the Hindu calendar. Happy Diwali and New Year’s everyone!). Also in a future blog another fun story from Hardy!

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**Me:** Let’s talk about some fun problems with prime numbers*. I’m thinking of two prime numbers that add up to 753, what are they?

**Nephew (instantly)**: Oh, come on, Uncle. That’s too easy. Clearly if the sum of two numbers is odd (in this case 753) then one of them must be even and the other odd. But the only even prime number is 2, so your numbers are 751 and 2.

**Me**: OK, you’re a genius.

**Nephew**: I have one for you. Think of prime numbers with a single digit repeated many times. The smallest such number is 11. What’s the next one?

**Me**: OK, Let’s see. A single digit repeated. A number like 777, hmm. Clearly the digit cannot be anything other than a 1 because if it’s any other digit like 7 the number will be divisible by 7 and hence not prime.

**Nephew**: Good

**Me**: So the prime will be composed of repeating 1’s. It’s not 111 because 111=37×3. It’s not 1111 because that can be divided by 11. What about 11,111? How do I check what the factors are for 11,111 or whether it’s a prime?

**Nephew**: You’re on the right track, my smart but oh-so-out-of-touch Uncle. Have you tried a great tool called * Wolfram Alpha*? It’s an

Try it and see if you can factorize 11,111.

So I pulled up my iPad, went to the site *http://www.wolframalpha.com *and typed in “factorize 11,111” as below:

Back came the answer:

It had factored my number: 11,111 = 41** ×** 271.

**Me**: You have shown me a great new resource, dear nephew. Now I shall try numbers with repeated 1’s to find a prime number.

**Nephew**: Great! And did you notice that you only need try numbers with 1’s repeated *a prime number of times? *So you needn’t try 1 repeated six times or 111,111 because 6 is composite. Since 6=3×2, you know 111,111 will be divisible by 11 or 111. Right?

**Me**: I was just going to say that myself. So the next numbers we will try will have repeating 1’s: 7, 11, 13, 17, 19, 23…. times. We tried them on the Wolfram Alpha Math Engine and got:

7: 1 111 111 = 239 **×** 4649

11: 11 111 111 111 = 21 649 **×** 513 239

13: 1 111 111 111 111 = 53 **×** 79 **×** 4187 **×** 265 371 653 **×** 14 064 697 609

17: 11 111 111 111 111 111 = 2 071 723 **×** 5 363 222 357

19: 1 111 111 111 111 111 111 = **Prime!!!**

Success! The smallest prime number with a repeating digit (after 11) is 1,111,111,111,111,111,111 or 1 repeated 19 times! We would never have been able to compute this using any conventional program like Excel or a traditional search!

Turns out the next one is 1 repeated 23 times and then we don’t see any more primes of this form for quite a while. They are there though. Many have been found but it’s a tough job even for very fast supercomputers.

Wolfram Alhpa is a real boon. Try it if you love playing with numbers or symbolic math. Here’s one last result I got playing with this fantastic math engine. I asked for the integral of secant(x). The answer, along with graphs, a Taylor’s series expansion and much more came out as below:

What a fun resource available to all math freaks!

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There is a great song from this movie called “Goodness Gracious Me!” which was a hit, particularly in India. It has hilarious lyrics, e.g.

From New Delhi to Darjeeling

I have done my share of healing,

And I’ve never yet been beaten or outboxed,

I remember that with one jab

Of my needle in the Punjab

How I cleared up beriberi

And the dreaded dysentery,

But your complaint has got me really foxed.

When I was a teenager in New Delhi this song used to play on the radio a lot and hearing it again it brought back big memories and I laughed hard once again as I did in those magnificent 1960’s and my college days. How fondly I remember them!

I’m appending a YouTube rendering of this song below. Please watch and you will love it. Also rent the movie, The Millionairess if you can find it. It’s a lot of fun.

Some things are evergreen!

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Everyone knows by now that our national debt stands at $16 trillion. There’s even a national debt clock that shows this every time some political hack wants to make an issue. But what does this number mean – that so far we have spent $16 T more than we collected in taxes at the federal level. To understand the debt and the annual deficit we must understand a key aspect of how the government does its accounting.

The government does its books on a ** Cash Basis **i. e., all the federal accounting, budgeting and assessments are done based on annual cash inflows and cash outlays, something no 21st (or even late 20th) century financial entity would be allowed to do. Only the government among major economic bodies (Corporations, NGO’s, Partnerships etc) does business and reporting this way and it distorts the picture immeasurably. If we want to have any chance of understanding the public products, services and obligations and the time lag with which their costs and benefits kick in we have to unravel this cost basis accounting and see what’s lurking below.

Cost Basis does not recognize accrued costs and obligations. The federal government has many, many future obligations (that we can define and quantify to varying degrees right now) that it does not include in its deficit calculations. Our budget deficits are based solely on what the government pays and receives in taxes every year, not the obligations we accrue.

______________________________________________________

In this form of accounting, our deficits are not caused

Surplus (Entitlements): $2.5 Trillion

Net Debt: $16 Trillion

______________________________________________________

If we are going to use an *accrual standard* to measure Entitlements and their impact on our debt then we have to use the same standard to measure other future obligations of the government and the hue and cry must be just as vicious about paying for those or going “bankrupt”.

Let’s look at three of the other (out of many) accrued deficits:

1.** Infrastructure Repair and Upgrade Deficit**. By some measures we are reaching dangerous levels here – budgets have been slashed for infrastructure since the 1980’s. The *Accrued Deficit: $5 Trillion* (or so, give or take a trillion). See figure for 5-year shortfall in chart to right

2. **Education and Training Deficit**. Part of our chronic unemployment comes from a neglect of the training of our work force. We need an urgent *Repurposing of our Labor* pool if we are to compete in the 21st century. If we start now the results will still take many years to materialize so we can’t wait. Tom Friedman, Bill Gates and El Arien of Pimco, to name three prominent people have been screaming about this. Estimated *Accrued Deficit: ?? Trillions.*

3. **Insurance Deficit**. Our government has a large national insurance function. For example. It insures nuclear plants, banks and savings deposits etc. It insures against natural disasters such as hurricanes, earthquakes etc., against major accidents, such as oil spills or coal mining accidents, against disease outbreaks, security breaches, such as terrorism, against unemployment and destitution. You name it. A whopping percentage of the government function is insurance – we need this public good, it seems for without it there can be no power plants, oil drilling, banking or the safety net. But unlike private sector Insurance companies the government does not have to set aside reserves to pay for its future obligations. When these obligations kick in, as during a severe recession (2008-2010), or a natural disaster, big deficits are generated. *Net Insurance Deficit: 3-5 Trillions* by some estimates – depends on assumptions about future economic conditions also.

OK, I don’t need to name all deficits *not explicitly included* in the debt of $16 Trillion.

**Good News**

This is HORRIBLE, you say. Is there any good news that points the other way? Yes, there is. And this is where some of the solutions may lie.

When you account on a Cost Basis you do not distinguish between Expenditures and Capital Investments. Both are treated as an outflow of cash. However, capital investments are not cash merely consumed. They produce future cash flows and other benefits. These future benefits are also not included in a Cash Basis Debt number. So when proper Capital Expenditures are accrued properly the real deficit does not grow as fast as the Cash Basis deficit and the future cash flows produced are unaccounted *deficit reducers*. Good news, huh?

This fact can be used to mitigate our employment problem and *reduce the debt* at the same time!

**Here’s an example:**

Say you want to produce 3 million jobs per year (as Romney said he would *magically* do by cutting marginal tax rates). The Government can borrow and spend about $100 billion (per year for as long as it takes – probably one presidential term) rebuilding our infrastructure. Each $billion produces 14,000 direct jobs and about the same number indirect ones. (See my blog here for details). So $100 billion will produce about 3 million jobs. On a cash basis you have just increased the debt by $100 billion/year. But since you have reduced the infrastructure debt by the same $100 billion the net deficit (on a rational accrual basis of accounting) is unchanged. The cost of borrowing: Less than 1%/year for a five year period. Add in gains from: not having to pay unemployment benefits and increases in income tax revenues and this is a hugely beneficial way to* reduce the deficit* while seeming to increase it.

We need this kind of bold analysis to create policies that have a chance to get us out of our mess.

**The second part of the solution** can be from technical innovation, productivity increases and a faster growing economy. During the last century the US grew at a compounded rate of 3% for generations because the US developed every new technology worth inventing – airplane, nuclear tech, integrated circuit, internet, satellites and GPS, biotech … you name it.

I saw an interview with Professor Sadoway from MIT working on materials technology (on Steven Colbert’s TV program) who is close to making a battery that can store 100 times the power than today for the same amount of weight. If perfected this technology alone could bring down the price of oil to $20 per barrel (he said) by boosting alternative energy production.

As for our Medicare costs and medical costs in general we are projecting to spend $30 Trillion in the next decade as a nation on healthcare. These could come down substantially in the coming years due to converging technologies that will produce zero-cost diagnostics and personalized cost-effective wellness solutions. See my blog on this here.

This kind of solution has to be adopted by our nation as a matter of policy. If deficit spending is required to increase the chances of such technologies coming to fruition then let’s do it, despite the howling Republican luddites. (OK, they’re not all Republican and that was a cheap dig).

Anyway the point is that the CBO can project burgeoning deficits all they want – they have no way to assess the power of exponentially growing innovation and technologies. If we are unable to continue innovating then, yes indeed, our deficits will be untenable and we will inevitably see a horrible decline in our standard of living.

But what if are able to embrace the vision in Peter Diamandis’ book, Abundance, throw the anti-science medievalists out of our leadership and decide as a country to forge ahead on the vision….. the deficits will vanish.

My fingers are crossed.

.

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I completed the New York Times crossword puzzle today where the theme was taken from the W*itches’ Brew *scene in the play, *Macbeth,* the great Shakespearean tragedy classic. The scene is a dark cave with a cauldron boiling in the middle to the sound of howling winds and thunder. Four shriveled hags are tending to the witches’ brew in the cauldron and throwing in ingredients as they shriek their evil portents and incantations. Four of the answers in the puzzle were *Ingredients* in the witches’ brew:

- tooth of wolf
- blind worm’s sting, and
- lizard’s legs
- slips of yew

A delightful puzzle indeed for Halloween night. Setting the right mood for the morbid delights of this holiday that seemingly celebrates evil and brings us in a benign way with the objects of our fear and the dark side of the world.

Shakespeare’s lines for the witches are beautiful – in rhyme and meter suitable for incantation and the ingredients are all the scary images of the Elizabethan mind. Here’s an excerpt:

Fire burn, and caldron bubble.

In the caldron boil and bake;

Eye of newt, and toe of frog,

Wool of bat, and tongue of dog,

Adder’s fork, and blind-worm’s sting,

Lizard’s leg, and owlet’s wing,—

For a charm of powerful trouble,

Like a hell-broth boil and bubble.

Fire burn, and caldron bubble.

Witches’ mummy; maw and gulf

Of the ravin’d salt-sea shark;

Root of hemlock digg’d i the dark;

Liver of blaspheming Jew;

Gall of goat, and slips of yew

Sliver’d in the moon’s eclipse;

Nose of Turk, and Tartar’s lips.

………..

So this is what you put in a witches’ brew: Eye of newt, toe of frog, wool of bat and tongue of dog. Adders’s fork and blind-worm’s sting, Lizards’s leg and owlet’s wing….

Even some politically incorrect stuff: *Liver of a blaspheming Jew??*

I love it. How delicious! Only Shakespeare can invoke such dark imagery.

In this spirit I thought it might be fun to come up with my own incantation on what terrifies me on this Halloween night. Shakespeare I’m not, but here goes (and certainly I’m not hiding my lack of political correctness):

ALL:Double, double toil and trouble;

Fire burn, and caldron bubble.

WITCH #1:In three debates all slick and shrewd

A grim charade have we viewed

WITCH #2: Thrust and parry, lie, intrude

Play with facts, be loud and rude

WITCH #3:And now election doth come nigh

Whose snake oil will the nation buy?

ALL:Double, double toil and trouble;

Fire burn, and caldron bubble.

WITCH #1:A carrion-rippin’ raptor’s beak

Vacuous, sneering Palin-speak

Infrastructures’ slimy rust

Workers’ savings going bust

Wiggling vermin in your creel

Healthcare Law – loud repeal

Spend and borrow, beg or steal

Private capital, vulture deal!

Mafia bosses in the pews

Blatant theft of Union Dues

False debates and jaundiced views

Outright lies on Fox News

WITCH #2:Workers’ burden – broken backs

Minimum wage, social cracks

Greedy poor – lazy blacks

Quick, pledge the rich – no new tax!

No science, please they’re flat earthers

Paranoid – blatant birthers!

They Sing “America” full of smiles

And stash the loot in Cayman Isles!…

OK. You get the drift. Write your own Halloween scary verse. Post it here and let everyone get a good scare!

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We had gathered together at the Berkeley site of MSRI for an annual celebration to honor Martin Gardner, the famous gamer, puzzler and magician who wrote the column *Mathematical Games* for *The Scientific American *for 25 years. Many of us grew up loving his column and spent endless hours solving his posers and reveling in his tricks.

Elwyn Berlekamp, the well known author of several books on Nim-like games was there, playing Dots and Boxes with kids and other visitors. He runs a nifty outfit called *Gathering for Gardner,* whose website is here. Their logo reproduced below is really cool as it reads exactly the same when you turn it upside down – this is the sort of thing Martin Gardner loved.

In the spirit of Martin Gardner many math puzzles were presented to the attendees.

I discussed the following 13-link chain puzzle with Gary – a puzzle that I have known since my grandfather posed it to me many, many years ago and one I had immensely enjoyed. Gary loved the puzzle and has posted it on the New York Times blog today. So check it out, see if you can solve it and send me the solution, or your comments or questions. I’m reproducing the puzzle below as well:

The 13-Link Chain Puzzle

You have a balance scale and a single chain with thirteen links. Each link of the chain weighs one ounce. How many links of the chain do you need to break in order to be able to weigh items from 1 to 13 ounces in 1-ounce increments?

As with all puzzles that have Martin Gardner’s elegance and spirit, this puzzle is very pleasing at many levels and encompasses some more general math patterns that are endlessly extended by people who then pose ever-more evolutionary puzzles based on this.

For those of you who want more of these fun puzzles try out the ten off-the-shelf classical (and simple) Martin Gardner puzzles here. (From Elwyn’s Gathering for Gardner site)

Happy Solving!

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On July 4 of this year an historic announcement was made to the world: “I think we have it!”

The “it” was the elusive Higgs boson, something for which the physics community has been searching for decades to complete the so-called Standard Model which describes the fundamental building blocks of our universe. In December I wrote about the Higgs and the building excitement as physicists began to see signs of its existence. See my blog about the Higgs and the Standard Model here. Sometimes called the “God” particle the Higgs is a *theoretically postulated* particle that endows mass to matter.

Without the Higgs field nothing can have mass and the world as we know it cannot exist. If the Higgs were found not to exist we would need to revise all of physics and come up with new theories regarding the fundamental building blocks of nature.

The announcement that the Higgs was almost definitely spotted was made at CERN, home of the Large Hadron Collider (LHC), where protons are smashed together at almost the speed of light at energies never duplicated at any other facility. As they collide the energy of the protons is converted to other fundamental particles, including the very, very short lived Higgs that decay rapidly, but into predicted decay products that are analyzed in massive detectors. See a wonderful video explaining the whole process and capturing the jubilation at CERN at the announcement, below.

The detection of the Higgs is an amazing feat, something that shows what we can accomplish if we set our minds to it and work with each other. The Large Hadron Collider is a great collaboration – funded by dozens of countries and involves tens of thousands of physicists from some 40 different countries around the world. Some of the awe inspiring statistics are:

- The world’s largest superconducting magnets cooled by the world’s largest refrigeration system. These are used to accelerate protons in the underground tunnel loops to 99.99999999% the speed of light!
- The highest energy particle beams (4 TeV in 2012) and collisions ever achieved.
- The most sophisticated detectors ever conceived are deployed. The ATLAS (stands for A Toroidal LHC Apparatus) detector, for example, is located at the point where the proton beams intersect and tracks, identifies and measures the myriads of particles produced. This detector alone weights about 7000 tons (as much as the Eiffel Tower) and has a dedicated team of 3000 physicists from 174 universities in 38 countries studying its output.
- The other general purpose detector is called the CMS (Compact Muon Solenoid) – pictured above – with silicon pixels and silicon strip detectors to capture the tracks of charged particles and a muon detector. CMS too has an independent team of physicists studying its huge data output – 3000 physicists from 183 institutes and 38 countries. One such country is India which has an important node in the data processing worldwide collaboration at TIFR (Tata Institute of Fundamental Research) and through a 1 gigabyte-per-second direct link to the data via Fermilab. TIFR then distributes the data to other universities and labs around India for independent evaluations and analysis.
- Out of, oh about, 10,000,000,000,000,000,000,000,000,000,000,000 or so proton-to proton fly-by’s (so far) the total number of excess decay particles with the specifics we seek to confirm the existence and mass of the Higgs is only about 200 particles! It’s looking for the ultimate needle in the haystack. Amazing what signal to noise ratios our modern experiments and computing can achieve.

I am making a trip to India next month where I am planning to meet with several of the physics groups working on the Higgs data and learn first hand about the epochal discovery and the exciting work that remains to pin down many of the still unanswered questions regarding the Higgs. I hope to visit TIFR as well as other auxiliary centers doing some world class physics. See a great presentation (dated August 29, 2012) posted by Professor Kajari Mazumdar of TIFR about India’s role in the discovery of the Higgs.

With the LHC we have essentially built a time machine that takes us to within a trillionth of a second after the Big Bang when the temperatures had cooled enough (to about 10,000,000,000,000,000 degrees C) for the Higgs to form and endow everything with mass. It’s amazing that we can conceive and experimentally do such things!

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I have been a sponsor of MSRI in past years and am very grateful to my friend, Elwyn Berlekamp, for getting me involved. Elwyn has written some great books on mathematical games that I have loved reading. At a gathering of MSRI not long ago I had a great time meeting some wonderful math enthusiasts – many teachers, researchers, entrepreneurs and authors with delicious insights into all aspects of pure and applied math – like chaos theory, logic games, nonlinear algebra and information encoding.

I also met a gentleman who had used his considerable math prowess to built some pretty effective quant (or quantitative) models to simulate the financial markets and exploit minute inefficiencies in high frequency trading for impressive profits. He told me about his Hedge Fund which he runs from the Bay Area and which has a direct computer line to the financial markets in New York and other locations. He had encoded his quant model into computer software that trades without active human intervention automatically, swiftly and emotionlessly using the direct access to the Exchange computers. From what he told me I was able to piece together some of the salient features of Hedge Funds that use this method of trading and their characteristics.

I am providing below a narrative of a hypothetical fund, a composite similar to the one run by this gentleman in some aspects. The names and figures have been changed and many aspects such as taxes have been generalized from what I was told.

John Q. runs a limited partnership Hedge Fund for which he has formed an entity, *Quant Investments,* (QI) to act as a General Partner. The Hedge Fund* *has 25 limited partners who have contributed $900 million for the Fund. These limited partners are high net worth individuals as well as other pools of money, such as Pension Funds or Managed Wealth portfolios. The Fund does high frequency trading using a proprietary mathematical or quant model. It turns over its portfolio several times in a month, sometimes in days, exploiting inefficiencies. This year the fund is up 40% or by a whopping $360 million. John Q.’s compensation consists of a 1.5% management fee plus 20% of the profits above a threshold. This amounts to about $65,000,000 in the year after all his expenses!

John Q., if he treated the entire compensation of $65 million as ordinary income would have to pay 35% in Federal Taxes. It turns out that most Hedge Funds’ General Partners (GP) can treat their compensation – the part that is 20% of the profits – as Capital Gains. This brings the federal tax rate down to only 15% if the gains were fund on assets held for more than a year. How this direct income from investing by the fund manager can be capital gains boggles the mind. Also utilizing the margin rules of the exchanges he can borrow against his equity, increase his bets and make even a larger profit – all Capital Gains!

But John Q. does not want to pay any taxes that he can legitimately avoid. (it’s his responsibility and duty as a businessman, as Mitt Romney said). So he sets up a Cayman Island shell company that he owns indirectly. Let’s call this company *Quant Investments, CI Ltd. (QIC). *This company buys (from *QI)* the quant software, as Intellectual Property, for $65 million, say. (Paid using the $65 mill first year’s profit, which John Q. defers to himself, thus incurring no personal taxes). This creates a one-time long term gain for QI and John Q. taxed at a rate of 15%. Every year thereafter QI pays royalties to QIC roughly equal to John Q’s compensation and so has no net profit and no net taxes from American operations. QIC, of course has obscene income from its Intellectual Property holding but that is not subject to taxes, Cayman Islands being a tax haven.

So John Q., who makes 8-figure incomes, pays virtually no taxes! He is classified as a “Small Business” and a job creator in the Romney/Ryan lingo. Maybe this is one of the loopholes they will close that will make their tax cuts revenue neutral. Don’t count on it – there are donor lobbies here pulling the strings.

I asked the Hedge Fund guy I met how many people he employed and he said, “Six”.

That’s it. 6 people and a small offshore group of programmers to provide updates and maintenance to his software. Some *Jobs Creator* for a small business with revenues of hundreds of millions, wouldn’t you say!

Truth is that many small businesses that earn more than, say, 1 million are hedge fund types. They play zero-sum games with our financial system where they have a special advantage through special access or fancy quant models. They move large sums of money from A to B and keep a cut, producing no new product or service. Since the game is zero-sum you wonder who the counter parties are that are taking the losses. They also employ very,very few people.

For last year (2011) here are the statistics:

- The top 25 hedge fund managers took home an average of $576 million each.
- And that was a down year.
- Last year’s total compensation for the top 25 hedge fund managers dropped 35% … to $22 billion.

These guys feel entitled to their riches. They feel they are smart. After all they can build sophisticated data-mining models of the complex economy and financial markets that no one else can. They see themselves as hard working geniuses, deserving, self-made millionaires. And they whine like hell when they have to pay anything in taxes. They scream of Socialism, Class Warfare and job-killing government interventions!

I asked the fund manager I met what real product his small business produced for America. His answer was typical: By filling inefficiencies in the market we are creating a more rational marketplace. Further we are creating liquidity by increasing the volume of trades. And finally, we are providing for the hedging of risk – our counter parties are using us to reduce their risks.

What malarkey!

The feeding frenzy on Wall Street today is so fast and intense that few appreciate it – until something goes wrong and we hear about it. A couple of months ago a high frequency institutional trader called Knight Capital had a glitch in its automated trading software.

It started making erratic trades.

Immediately the market plunged about 10% (in a matter of minutes). This created inefficiencies that other computer trading software spotted and they had a buying spree. The loss to Knight Capital was estimated at around *half a billion*! The market went back up, but Knight almost went bankrupt and had to get an infusion of money from (presumably) a w*hite knight*. Also if you were a small investor with a stop loss order at, say, 10% below the day’s market price, you got stopped out and did not participate in the correction. You were scissored by a shark infested feeding frenzy! Welcome to the furious and fraudulent poker game we call Wall Street!

The truth is that, despite all the wailing by the special interests, the current administration has done nothing to regulate Wall Street. The pathologies that gave us the $30 Trillion dollar mugging of 2008 continue. The collective howling about “too much government” etc. has had its desired effect.

Obama has been cowed (if he ever intended otherwise) to make only cosmetic changes to a very dangerous crooked game being played with naked greed on Wall Street. *A simple fix, which would not even require any complex legislation, would be to limit all stock transactions to be cleared at the closing price of each day – a Dutch auction, such as is held for the direct sale of U. S. Treasuries.*

Meanwhile our dishonest debates go on. The real issues are not even on the table.

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