How 'bout that weather?

Growing up in Northern Illinois we were used to inclement weather. During the summer there were concerns about tornadoes and during the colder months the meteorologists would bang on about lake-effect snow. Midwesterners of all ages open conversations with comments about “how it is outside”; and in sports-crazy Chicago, the weather is obligatorily mentioned first as a little conservational appetizer followed by the main subject. “Man, it was such a lovely day in the bleachers up at Wrigley yesterday. Happ’s homer almost landed in Lenny’s Old Style…. that idiot was looking at his phone instead of the game.”

Weather is big business, and its effects carry huge financial consequences. In my current home, Copenhagen, the authorities are building an artificial island in the city harbor, Lynetteholmen, to protect against storm surges. In order to carry out such a huge infrastructure project there have to be studies covering water flow, environmental impact, public transport, housing, etc. All this requires data, and lots of it. Someone needs to store, crunch, and analyze that data, a daunting task even in this era of cloud computing.

Back in the US, there is a treasure trove of very granular data collected by… the Department of Commerce. The departmental name is misleading, it should really be called the Department of Data. Cabinet Secretary Gina Raimondo is responsible for over 45,000 employees working for the DoC which encompasses the US Patent and Trademark Office (USPTO), the Census Bureau, the Bureau for Economic Analysis (BEA), the National Institute of Standards and Technology (NIST), and several other divisions including the National Oceanic and Atmospheric Administration (NOAA) which itself is parent to the National Weather Service (NWS).

In 2011 a “super-outbreak” of tornadoes wreaked havoc in the plains states including a rather nasty category EF5 tornado that ripped through Joplin, Missouri claiming 161 lives and destroying or damaging 8,000 homes. ?After these events many Members of Congress from those straight-border, fly-over states took the NWS to task for not providing “an hour’s warning”. Post-tornado surveys of survivors in affected areas revealed that tornado warnings were adequate and timely having been issued twenty minutes before the actual events of that tragic day in May. ?

As behavioral scientist and meteorologist Kim Klockow-McClain explains in Michael Lewis’s “The Fifth Risk”: “They [survivors] were all aware of the warnings. It isn’t that people blatantly disregard warnings. It’s that they that they think it won’t hit them.” People tend to associate their home with safety which leads them to acquire “a false confidence that they would not be hit.” An example might be: ‘a tornado has never crossed the neighboring creek towards my house, thus a tornado never will!’ Tornadoes are equal opportunity destroyers determined by winds in the upper atmosphere, not by local topography.

The study of behavioral economics is an interesting field. We tend to see patterns in very much the way we tend to see faces in inanimate objects. ?Perhaps its our instinct from our time as hunter/gatherers to identify and evaluate risks according to our perception. ?Multivariate logistic regression can help us identify statistically significant determinants not only in relation to weather but to behavior in the financial markets.

We as professional investors all tend to see the warning signs: red lights flashing, doomsayers on social media and TV, rabid analysts with a bone to pick, etc. “I’m heading for the hills!” is a less common reaction than “Meh, that warning’s not for me, it’s for the other suckers. I know better than they.”

I have spent the past decade studying market structure, and the more I learn, the less I know. Every door opened allows a blob of raw data to seep out, land at my feet, and confuse me. I try hard to make sense of it, but how am I to know if my interpretation is the right one? The fact is I don’t. I venture my own opinion based upon my own interpretation and experience, but it doesn’t mean I’m correct. If I waited for others to do it for me, the world would pass me by, and if I can make an educated assumption to choose a path, I will do so, even if the data is incomplete.

It is my experience that certain vendors and financial institutions purposely obfuscate this information since the cleansing of it can be a very profitable exercise indeed. A data manager with ?200 institutional clients might ask of them each to cough up $50,000 – $100,000 per annum to help roll out DataCruncher 8.2 next September. What they tell you is that neither five quants have been developing this roll-out months already for a mere fraction of the cost nor 199 others are being asked to pay for the same R&D. All legal, all above board, all very good for the bank account.

Prime skills for traders, both buy and sell side, are increasingly leaning towards programming and analysis. Sales are crescively becoming more relationship managers than fine dining companions. The catalyst is data, access to it, and understanding it. However, its not just market information, it also includes regulatory and behavioral intelligence.

In 1983, the quintessential blue-blood East Coast firm of Morgan Guaranty Trust Company of New York supposedly included this gem in its employee manual: “Avoid saying hello. This elsewhere pleasant and familiar greeting is out of place in the business world.” Financial market participants are more Midwesterners at heart. Booting up the Bloomberg is instinctively followed by a comment along the lines of “Boy oy boy, have you seen the markets this morning?” This question is often dropped even before a simple hello, if even a greeting is forthcoming. Maybe the bosses at JP were right.

Sometimes it is worth it to step outside, look up in the sky, and gauge how the weather is. If nothing else, it’s a good icebreaker, especially when interacting with someone from the Midwest.