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.

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.

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.

We are all socialists now – review of Demons of Democracy

If the US has as tolerant society as it advertises, then why did the mainstream media attack North Carolinians so viciously when they voted to keep traditional bathrooms? And why do bakers go to jail for refusing to crown a wedding cake with two men? Doesn’t diversity and tolerance require, well, diversity and tolerance? Not in the smoky hall of warped mirrors that is liberal democracy according to Polish professor and author Riszard Legutko in The Demon in Democracy: Totalitarian Temptations in Free Societies. He does not mention Hans-Hermann Hoppe’s Democracy: The God that Failed but he makes many similar points.

Legutko is a professor of philosophy at Jagellonian University in Krakow and a writer on politics and philosophy. He co-founded the Centre for Political Thought after the collapse of communism. He has been elected to parliament, held cabinet positions and is currently a member of the European Parliament.