by Jack Tenney, Publisher
It’s funny-number time this summer. The Europeans have gone to negative interest rates, there will be five Fridays, Saturdays, and Sundays in August, and the Red Sox went 7 and 3 for three straight games in June but still stunk.
Red Sox first, because it demonstrates how trends can deceive, which makes stock-picking and portfolio management appear to be crapshoots, which they are. The 10-game stat for wins and losses puts a baseball team’s performance in perspective but can be useless when teams become streaky.
Here’s the deal: The Sox went over the falls in late May with a 10-game losing streak, then won seven in a row followed by three losses. Therefore, at the end of the winning streak, their 10-game record was seven wins and three losses, or pretty good. Were a team to accomplish that for the season they would have a record year. No team in the 2013 season won 60 percent of its games, let alone 70 percent.
Consider the following: Assume three teams had identical records of seven wins, six losses. However, one team matched the Red Sox’ three-loss, seven-win, three-loss record. The other teams amassed their records differently: one winning the first four games and last three, sandwiched around a six-game losing streak; the other team winning the first game and every other odd-numbered game. Check out their 10-game stats from the 10th game on. The Sox are killers — 7 and 3, four times! — but the streaky team was 4 and 6 and the odd baseballers were 5 and 5.
Had you bet a dollar on each game the three teams played, you would come out a dollar ahead (people do bet on baseball games, I’m told!). Had you employed a money management system of pressing winning bets once and adding a unit on the third win, you could really clean up with a long winning streak.
Enough about baseball. What’s with the August calendar stunt? All you need to have five Fridays, Saturdays, and Sundays in a month is a 31-day month starting on Friday. Like January of 2016. I guess the three-fers can happen in any 31-day month (January, March, May, July, August, October and December, remember?).
What’s the deal with negative interest? To me, central bank interest rates are like economic thermostats. By fiddling — of course they don’t fiddle, do they? — with the rate lending institutions are paid on their excess reserves, member banks are encouraged to manage the relationship between their deposits and loans. A bank’s loans are really assets to the bank, while its deposits are liabilities.
Assets have to be financed with liabilities and capital. Banking systems work when there are tons of good loans to be made and the banks themselves are levered 10 times or better. The hope is that European banks will start making good loans, or better ones than negative interest.