God is a Capitalist

Thursday, May 26, 2016

Golf, economics and fundamentalist investing

Scottish people will always have trouble getting into heaven because they have tempted humanity with two infamous inventions: golf and economics. They’re trying to make up for it with their whiskey, and doing a pretty good job, but the final judgment is up to someone else.

Golf offers a few lessons that would help economists as investors if they would pay attention. The chief lesson is get back to the fundamentals. Fundamentalism has become a curse word lately, but in Christianity it originally meant one who held to the doctrines of the virgin birth, deity, death and resurrection of Jesus Christ, that is, the fundamentals of the faith. Fundamentalists were distinguishing their concept of Christianity from the modernists who denied all of the fundamentals but for some strange reason, or out of pure dishonesty, continued to call themselves Christians. Twenty years ago a few journalists intent on advertising their ignorance began misusing the word and today a fundamentalist is the vilest murderer on the planet.

We should rescue the term from ignorant journalists. (Other words need rescuing as well, such as liberal and justice.)Those who practice the fundamentals of any discipline are fundamentalists and the fundamentals are important in most areas of life. In football the fundamentals are blocking and tackling. With investing, fundamental analysis is extremely important. In golf they’re grip and swing, according to the golf masterpiece, Harvey Penick’s Little Red Book. Penick recommends revisiting the fundamentals when you’re golf scores suffer from inflation. Are there any fundamentals in economics that could rescue the field from the macro confusion that threatens it today? Yes. The fundamentals of economics are in micro.

Two schools of macroeconomics exist – Austrian and mainstream. But the mainstream world is split between paleo-Keynes, neo-Keynes, monetary and neoclassical. In spite of their common origins, they imitate their socialist counterparts in other fields by fracturing and fighting over insignificant details. All of them pretend that micro doesn’t exist and try to build their systems through correlations of aggregates, such as aggregate demand, aggregate supply, savings, investment, exports, money supply and GDP.

On the other hand, Austrian economics builds up its macro on the certain fundamentals of micro. There are no schools in micro. Micro is just micro because the principles of micro are the most certain in all of economics. No good economist disputes the laws of supply and demand, or diminishing marginal returns, though mainstream macro pretends they don’t exist.

The focus of Austrian economists on the fundamentals has enabled them to craft the best business-cycle model in the field. Mainstream economists are still stuck, after eighty years, with “crap happens!” They call it “shocks,” but it’s the same thing.

So if you find you investing landing in the rough, try getting back to the fundamentals: the market follows profits and profits follow the business cycle, the Austrian business-cycle.

Monday, May 23, 2016

Party like it's 1999

 The lyrics to one of the late Prince’s songs, “Party like it’s 1999,” seem more appropriate today as writers applaud new tech companies. In the late 90s, all an entrepreneur had to do to raise money for an idea was attach the suffix “dot com” to his company name and hot money would rain on him. That enthusiasm for tech stocks drove the NASDAQ to the stratosphere where the lack of oxygen makes people hallucinate. The crash that followed in 2000 punished the dreamers severely.

A similar euphoria is gelling around the fintech, or financial technology, that intends to transform finance. One fintech company is SoFi, a San Francisco based company whose founder claims it will do to banking what Uber has done to taxis. You may have seen its Super Bowl 50 ad, “Great loans for great people.”