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Markets’ Visible Hand

Everything is theoretically impossible until it is done.
Robert Heinlein

Over 200 years ago, Adam Smith wrote that “[producers] are led by an invisible hand to make nearly the same distribution of the necessaries of life (Wealth of Nations, p. 540).”

The phrase “an invisible hand” is a metaphor for unseen market influences (A), still widely used in economics. It is a cousin to the maxim, “see what the market will bear,” addressing buyers’ product reactions. Proponents would have you believe that seeing these forces is impossible.

Sometimes, seeing what is invisible to the naked eye is as simple as flipping a switch. The Costa Concordia captain sailed into the Isola del Giglio (B). To prevent that disaster, all he had to do was turn on a computer that he had shut off and use its information.

Adam Smith had it all wrong.

If we’re using metaphors, using the “Visible Hand” to describe market workings is more fitting. As we see in (C), the S&P 500 formed an upper price limit on 2/20/23. It does that every day. In short, all buyers in all markets self-organize in ways we can describe and use.

To see how this works, watch the seminar recorded on Auguest, 29, 2023 further below:
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How to Lose €10B+

The race is not always to the swift, nor the battle to the strong, but that’s the way to bet.
Damon Runyon

According to Harvard professor Clayton Christensen, nearly 30,000 new products are introduced yearly, and 95% fail.

But there are ways that one can help increase the potential for product success. It involves determining the Value, Demand, and Cost of goods and services before they launch. Buyers reveal how they Value the product features and their Demand. It is up to producers to figure out those parameters, along with their Costs. Not looking at all those variables in advance is a recipe for financial disaster.

You’re bound to fail if you placed a heavy bet on a program with long odds against you– but you went ahead with it, got it into production, and rode it out until it ran out of steam after losing tens of billions of Euros. That is the conclusion I reached for the Airbus A380 in my paper, “CSI EU: Cost Scene Investigation,” for which I won the ICEEA 2023 Best Modeling and Case Studies Track Paper. This step-by-step analysis gives you the framework for creating models that enhance your chances of being that one in 20 product that succeeds. Below is the video of the presentation:
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Proper Production Possibility Curves

There are no solutions; there are only trade-offs
Thomas Sowell

Forget the “classic” choice model between guns and butter with its single imaginary frontier. Such notions offer no basis for action. Never settle for heuristics when you can have analytics. To reveal true alternatives, we’ll need to do some heavy lifting.

In 4D.

No, really.

In A, we find an aircraft Demand Frontier in yellow. If we want to make 100 units (Quantity – Dimension (Dim) 1), we find our price limited to $393M (Price – Dim 2). For 55 copies, our price could rise to $610M (purple lines). In A’s Value Space, the sustainable price goes up with range (Dim 3) and velocity (Dim 4) but down with added units; thus, the angled Value Response Surface for 55 units is higher than that for 100 units. They form straight lines in log space where they intersect their respective price ceilings (the horizontal yellow and purple planes in Value Space). In B’s linear space, those intersections form multiple curves revealing the proper trade-offs. The yellow line shows us we could build a plane with 10K in range, with a max V of just over 1400 KPH.

It takes work to find Demand and Value, but in the end, we get insight available nowhere else.

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Markets Across Seven Dimensions

One should concentrate on getting interesting mathematics.
Paul Dirac

Let’s examine how markets work together across 7 dimensions.

Far from being some exotic mathematical anomaly, such arrangements occur daily across many markets. Please feel free to offer some feedback.

To make a pencil, given wood, you’ll need graphite.  Making a bike takes a frame and tires.  These markets are bonded—you can’t make a final product without some key pieces.  How do bonded markets such as jets and their engines interact across 7 dimensions?

Let’s look.

In the 7D diagram below (with log scaling in all directions), turbofan engines use Dimensions (Dims) 1-4.  As Specific Fuel Consumption (SFC, Dim 1) goes down and Max Thrust goes up (Dim 2), turbofan prices, reflecting their Value, moves up as well (Dim 3), with Quantities sold (Dim 4) limited by the market’s demand frontier (yellow line on the red, right-hand Demand Plane).  Making a new engine with a specified level of SFC and Max Thrust yields a value of the large green sphere, marked by “T,” at left.

That engine supports a new business aircraft model and accounts for a portion of the plane’s cost, marked by the large green sphere labeled “B.”  Aircraft Value goes up (Dim 3, shared with the engines) with Max MPH (Dim 5) and Cabin Volume (Dim 6), as limited by their Demand Frontier (Dim 7).  Such entanglements exist in all bonded markets.  They must be studied thoroughly to be optimized.

#hypernomics #markets #innovation #economics

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Help Your Partner; Help Yourself

Together we stand, divided we fall;
come on now, people, let’s get on the ball and work together.
Canned Heat, Let’s Work Together

Upper Demand Frontiers form in every market outside of commodities. You can prove this by plotting shares for all S&P 500 companies on the horizontal axis against their sales prices on the vertical (best seen in log-log space). For any given day, you’ll find an Upper Demand Frontier takes shape.

Frontiers limit sales. How do you work around them?

Hypernomics enables us to see how interconnected markets work. In (A), the Boeing 787 Business Jet was, for a period, pushed up against its Demand Frontier (the dashed blue line). One of its compatible engines, the GE Genx-1B, found itself in a like condition, hard up against its Demand Frontier (in B, the dashed orange line). What to do?

If GE, whose engines make up about a quarter of the B787 cost, finds their Learning Curve (recurring costs, as the solid orange line) below their price limit, they could drop their prices and make more profits. That would enable Boeing to lower their B787 business jet price and do the same. Knowing your partner’s place in the market is key to making them and you more profits.

#hypernomics #profits #markets #partner

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Long Time Coming

It’s not that I’m so smart, it’s just that I stay with problems longer.
Albert Einstein

There’s something deeply affecting about staying with a problem for over 30 years. Once you get some resolution, part of you wonders why it took so long to get answers. A more forgiving part of you thanks Einstein for the inspiration to carry on. One can only be happy when that ah-ha moment finally arrives.

Such is the case with Hypernomics. After first entertaining the idea at 14, somewhere around 49, I saw the first hints of the practical applications of Hypernomics. 18 years later, we have evidence of its practicability in one of the most complicated markets, that of securities.

In Feb 2020, we made our first investments based entirely on Hypernomics. Far from being perfect, tests suggested that given a market downturn, we would suffer losses. Figure A shows we’ve endured setbacks in 2022. But backtesting supported the idea we would lose less than the competition.

In the longer run, in Figure B, the theory has had a chance to shine. Note the Hypernomics fund is doing more than 2X as well as Berkshire Hathaway and over 3X what the other major indices are doing.

#innovation #markets #investments #hypernomics

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Call Off the Panic

“Present fears are less than horrible imaginings.”—William Shakespeare

The FAA recently made clear it will impose more stringent requirements on Urban Air Mobility (UAM) vehicles.  In response, pundits started screaming about the end of that market even before it began.  They think the added costs are insurmountable.

Who told them that?

Yes, there will be significant costs in the added requirements.  But many companies have managed to work themselves through FAA regulations and come out with safe and profitable models.

Profitability, of course, is the key.  To clear development and certification costs, UAM manufacturers need to know if they can make money with their products.  All should note the United Airlines (UA) order from Archer.  UA will spend $5M for five-seat Archers, which are only slightly faster than five-seater Robinson R66s, which sell for $1.1M.  Oh, and the Archer has about a seventh the range of the R66.  The difference is the decibels.  Lower noise widens the market for UAMs, which should have comparable or lower costs than traditional helicopters (due to fewer parts) and higher prices.

Next time someone tells you the sky (or UAM market) is falling, see what they’ve shorted.

#urbanairmobility #UAM #markets #innovation #FAA

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Abiding By Minimums

One bourbon, one scotch, one beer – George Thorogood

In addition to all the great music he made, George Thorogood knew when he wasn’t drinking alone, he could move it on over to his local tavern and abide by their two-drink minimum.

Bar owners found enforcing that requirement necessary to keep them in business when they had entertainment. Who wants free riders when you can find those who will pay?

Hypernomics knows that minimum requirements are just as crucial as those dealing with maximums. Businesses go under if they don’t make enough sales – we’ll have more on that in the future.

Military forces have similar considerations. The United States Air Force found that spreading their aircraft around gave them more flexibility to fly to distal locations. They typically group aircraft into squadrons of 12 or 24 planes. But, when it came to the B-2, they found themselves at a loss.

As its price soared past the $330M/unit limit backing the 132 bombers they wanted, they got 21 B-2s at $1.2B each instead. With so few, they put them all at a single site, Missouri’s Whiteman Air Force Base, losing flexibility and response time in the process.

Too often, as we try to get everything we want, we lose sight of what we need.

#hypernomics #minimum #markets

The Value And Demand For Taxpayer Dollars

Don’t Worry, Be Happy – Bobby McFerrin

In May 2020, CA Gov. Gavin Newsom said he wasn’t worried about Tesla leaving the state.  Last month, when Elon Musk announced he was moving Tesla to TX, the Gov. changed his tune.  It seems he felt he helped create the company, citing the tax breaks he gave them.

Hypernomics has seen this argument before.  Breaks in CA usually amount to slight and temporary reductions in the business-crushing tax rates CA has compared to other states.  That’s why companies by the thousands have been leaving CA.  A legislative “solution” to lost tax revenue is to have CA tax requirements follow businesses and individuals once they leave the state.  But that 1) denies some tax monies to other jurisdictions and 2) makes it less likely for new companies to enter CA.

CA has the best weather in the US, but the Tax Foundation ranks it next to last in its business climate.  As hypothesized below, the Value to taxpayers increases with the physical and business environments. Increasing the latter’s Value makes it more appealing to taxpayers – if they are attracted enough to come into the state, they offer more Ways for CA to get needed tax dollars.  At the same time, all mature markets have Demand Frontiers, which deliver the Means by which they must abide.  It’d take lots of work to learn these forces in detail. But avoiding that effort leads to unpleasant surprises.

And worry.

#hypernomics #innovation #taxpayer #taxanalysis #markets #economics

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Details Depict Markets

If you don’t understand the details of your business, you are going to fail – Jeff Bezos

You’ve heard about people getting lost in the details.  What if the opposite is true?

Hypernomics finds that diving into details is the only way to comprehend a market.

Paul Samuelson wrote, “the equilibrium price…the only price that can last, must be at the intersection point of supply and demand curves.” (Economics, 4th Edition, p. 63).  While he won the Nobel Memorial Prize in Economic Sciences, he never worked in aerospace.  If he had, he would have discovered that no solitary “equilibrium price” lives there.

But there is even more to it.  As A reveals, the new aircraft market splits into those for Civil and Military submarkets.  Within the former, there are five sub-submarkets, and all of those have their Demand Curves which combine to form a collective Aggregate Demand Curve, B.

Helicopters perform missions, and each of the eight has its Demand properties, C.  With 75 models, there are hundreds of sustainable prices, all held up by the Value of their models’ features (not shown), as limited by their available funds (Demand).

Dig deep into the data and pay attention to the details.

You’ll find they’ll pay off.

#hypernomics #innovation #marketanalysis #markets