God is a Capitalist

Monday, June 26, 2017

Christian laissez-faire built this country

I have been looking for an economics text book for non-majors for years and finally found it in Francis Wayland’s Elements of Political Economy – published in 1837. It’s shocking how little good economics has changed in almost 200 years. But first, readers need a little background in order to appreciate the book.

Puritan economics in the US followed Calvin’s ideas closely and gave absolute control over commerce to the government. However by the turn of the eighteenth century, Puritan ministers no longer equated commerce with greed, but with “industriousness and prudence, moral reform and Protestantism’s interest in the world. They maintained that providence used overseas traders to protect English liberty and spread civilization,” according to Mark Valeri in Heavenly Merchandize: How Religion Shaped Commerce in Puritan America. And Isaac Newton, having been a great theologian as well as history’s greatest scientist, influenced Puritan pastors. Instead of viewing the hand of God directly causing events in the physical world, Newton described “nature as a system integrated into a regular pattern by universal physical laws” that God had created. God worked indirectly through natural laws.

Soon theologians began to find similar natural laws working in society to promote prosperity and order as well as to restrain vice. Prosperity no longer resulted from God’s favor at a Christian’s devotion but from following the natural laws of the market, and financial hardship was not a sign of God’s wrath as much as failure to understand and abide by God’s natural laws according to Valeri.
Writers on both sides of the Atlantic probed the meaning of the economy as a subset of this cosmic order. They described commerce as a series of natural exchanges that, by the law of nature, coalesced into a balanced system. This reading prompted pastors and merchants to imagine the natural dynamics of exchange as a divinely sanctioned, moral good. Innate desires brought people together into networks of trade that depended on mutuality, confirming the natural integration of variety into a whole; as Foxcroft put it, nature “impresses men with a deep sense of the bonds and benefits of society; and so excites them to feel the good of others” as they pursued their own economic good, “rendering their work daily more and more natural.” God designed the market system that ran by moral laws.

Monday, June 19, 2017

PhD’s and computers explain market volatility since 1980

Richard Bookstaber’s 2007 work, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, examines the huge increase in stock and bond market volatility since 1980. He notes that GDP volatility has shrunk while market volatility has increased. And if you graph the S&P 500, especially the year-to-year change, the massive increase in volatility is obvious.

Bookstaber, who has a PhD from MIT, writes that before the rise of computer trading, investment banks tended to hire college graduates who were also former athletes because managers thought they had the right temperament to handle the stresses of trading. Then computers came along and of course they need models to work with. Who had better models than PhD professors at universities? So the banks loaded up on PhD’s to create models for computer trading.

Bookstaber provides an insider’s account of the victories and tragedies of investment banking and arbitrage trading from the mid-1980s on because he labored in the trenches as a risk analyst, much of the time with Salomon Brothers. Two things stand out to Bookstaber: computer trading and innovation.

Friday, June 9, 2017

Trump still off key about trade

At the recent summit held in Europe of the seven richest countries, the G-7, President Trump trashed the German trade surplus, “The Germans are bad, very bad. Look at the millions of cars that they’re selling in the USA. Horrible. We’re gonna stop that.” German newspapers translated “very bad” as “evil.” Many "reputable" financial publications, including the Wall Street Journal, sang harmony with Trump. Here is a sample of the lyrics:
Germany’s current account surplus–the amount its exports outpace its imports–recently hit 270 billion euros, close to 8.9 percent of its gross domestic product. This upward trending trade surplus shows little signs of slowing and Germany’s current account balance may rise above 9 percent of its this year. Despite years of criticism from the Obama administration and the International Monetary Fund, Germany has shown no willingness to address the persistent imbalance.
Germany’s persistent current account surpluses add to German GDP while they subtract from the GDP elsewhere around they [sic] world. Germany is not just exporting products–it is exporting stagnation, job losses, and deflation.
Germany’s trade surplus with the U.S. is particularly large and damaging. It exports high-end manufactured goods to the United States–such as cars, auto-parts, chemicals and airplanes. Cars, for instance, make up more than 10 percent of its exports to the U.S. A more balanced trade in these goods would mean many more high quality jobs in the United States in regions that badly need them.

Saturday, June 3, 2017

D-Day lesson - decentralize decision making

June 6, 1945, Allied forces invaded the Nazi fortress of Europe. Not everyone cheered. General Douglass MacArthur said of the invasion that he would court martial the SOB who had planned it. Of course, he knew well the planner. He had worked as MacArthur’s aid for several years: General Dwight Eisenhower. The mass slaughter of Allied troops in the invasion horrified MacArthur. His philosophy had been to land where the enemy wasn’t and then attack. In dozens of amphibious landings MacArthur lost fewer men than the Allies lost at Anzio alone. Churchill had lobbied for the main landing in the south of France where the German presence was much thinner. Instead, Eisenhower and the Allied command chose to jump right into the the teeth of German troops in Western Europe.

The D-Day invasion succeeded in spite of being a very poor military strategy. But why? The Germans held a significant advantage and were very confident. The answer lies mostly in the field of organizational behavior, specifically, the issue of centralized versus decentralized decision making. In organizational theory, the larger and more complex the situation, the more decentralized decision making must become. Centralized decision making works best with routine and simple operations.

Monday, May 29, 2017

Reality mugs mainstream economist – what it means for investors

A conservative is just a liberal (socialist) who has been mugged by reality. Reality can sometimes change an old economist, too. That happened to Richard Bookstaber and he writes about it in his latest book The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction.

Bookstaber, a Ph.D. in economist from the Massachusetts Institute of Technology, ran risk management for Morgan Stanley, Salomon Brothers and Bridgewater and worked at the Treasury Department and the Securities and Exchange Commission. He is now the chief risk officer for the investments office of the University of California. Not a bad resume. He has a message for mainstream economists – the weakest part of mainstream economics is the math:
We are not robots with fixed, mechanistic responses to inputs. We face a changing world that, in turn, changes the context with which we view the world, and that changes us, again all the more so during periods of crisis. The critical implication is that we cannot plug numbers into a model and solve for the future. We cannot know where we will end up until we take the journey. And we cannot retake that journey once completed.

Monday, May 22, 2017

Socialists frighten about climate change and AI

I’m sure Elon Musk would be highly offended to know that he is a promoter of Marxism. After all, look at the number of businesses he has started. But he has admitted he only started those companies to promote change to cleaner forms of energy until the governments of the world recognize the problem of global climate change and pass the necessary laws to save us. By promoting global climate change (GCC) hysteria and fear about artificial intelligence (AI), while asserting that the problems are so large only governments can solve them, he is unwittingly promoting socialism. It’s an old socialist technique.

After centuries of attempts at socialism beginning with the Spartans, Plato’s Republic and Christian monasteries, atheists and deists (sentimental atheists) introduced the latest iteration of socialism in early 19th century France. Henri de Saint-Simon convinced his followers that the problems of the world were so large than only powerful states could solve them. He considered the chief problems to be poverty and inequality. Socialists were shocked and awed by the meager advances in the natural sciences so Saint-Simon proposed that a junta of scientists, led by a mathematician, should work together to solve France’s problems and dictate the solutions to compliant citizens. That has been the model for socialism since.

Monday, May 15, 2017

Investing tips from socialist Soros

Even though George Soros is a devout socialist, he knows something about investing. He writes about a typical cycle in the stock market in his book The Crisis of Global Capitalism. He calls his theory “reflexivity,” but the general idea is that the stock market usually tracks profits closely until near the end of the cycle.

As the reader can see from the chart below, the variance in profits isn’t as great as that in stock prices. The two begin to diverge about halfway through the expansion. All that means is that the PE ratio begins to inflate because credit expansion by the Fed is pumping new dollars into the economy. 

If stock prices remained tethered to earnings, stock prices would level off. To prevent that, the media send in the clowns. In a rodeo, clowns distract the bulls to prevent them from stomping the cowboy into the arena dirt, but in the market the clowns distract the investor. The clowns pull from their shirt sleeves old tricks to make the fundamentals look better. They use performance measures that rely on creative accounting, alternative profit measures, pro forma statements, and complicated valuation techniques. The clowns break the connection to earnings so that prices continue their ascent unrestrained by fundamentals. If the market was an actual rodeo, the clowns would be lynched for letting the bulls pulverize the cowboys.