Did Mises Become A Christian?

Having grown up as a Jew in Poland then Vienna at the turn of the last century, Ludwig von Mises, the greatest economist of the 20th century, had every reason to hate Christianity because they had murdered Jews for centuries. But worse for Mises, Christian intellectuals promoted socialism as Godly economics. Mises saw no way to reconcile economics and Christianity, as he wrote in his book Socialism: An Economic and Social Analysis, published in 1922:

The Gospels are not socialistic and not communistic. They are, as we have seen, indifferent to all social questions on the one hand, full of resentment against all property and against all owners on the other. So it is that Christian doctrine, once separated from the context in which Christ preached it—expectation of the imminent
Kingdom of God—can be extremely destructive. Never and nowhere can a system of social ethics embracing social co-operation be built up on a doctrine which prohibits any concern for sustenance and work, while it expresses fierce resentment against the rich, preaches hatred of the family, and advocates voluntary castration…

[Our] evidence leads to the negation of the question asked above: whether it might not be possible to reconcile Christianity with a free social order based on private ownership in the means of production. A living Christianity cannot exist side by side with, and within, Capitalism.

Trump's strength is his weakness - businessman economics

President Trump is clearly a good businessman. His wealth proves it. And it was partly his success in business that encouraged many adults to vote for him. The logic seemed sound: if the problem with the US is the economy then surely a successful businessman can fix it. But the fact that he is a successful businessman is Mr. Trump’s weakness as well.

Mises used to say that businessmen are better at predicting the short run than are economists so economists should not try to compete with them in their area of comparative advantage. The job of the good economist is to force business people to look up once in a while and acknowledge the long run. They can spurn the long run and court the short run, but the long run always shows up and the longer she has been ignored the uglier she is. The field of economics was born out of that insight, Mises wrote:

In order to discover the immediate-the short-run-effects brought about by a change in a datum, there is as a rule no need to resort to a thorough investigation. The short-run effects are for the most part obvious and seldom escape the notice of a naive observer unfamiliar with searching investigations. What started economic studies was precisely the fact that some men of genius began to suspect that the remoter consequences of an event may differ from the immediate effects visible even to the most simple-minded layman. The main achievement of economics was the disclosure of such long-run effects hitherto unnoticed by the unaffected observer and neglected by the statesman. (Mises, Human Action, 649)

How over confidence destroys earnings

“The curious task of economics,"  wrote Nobel Prize winner in economics Friedrich Hayek "is to demonstrate to men how little they really know about what they imagine they can design."

In other words, good economists are humble and that shows how few good economists live in the US.

Investors should be humble, too, and researchers have provided the proof. Two professors at the University of Maastrict published a paper at the beginning of this year on the question of “How Does Investor Confidence Lead to Trading?” The problem is not that initial successes spur investors to greater confidence.

Hence, we find evidence that our measure of investor confidence refers to a certain type of individual, as it is stable over time...Moreover, there is no evidence that any of the small fluctuations in investor confidence are driven by past returns, that is, that high returns lead investors to learn to be overconfident...That is, confident investors generally have lower returns (because of their higher turnover, see Section 5.1), but variation in those lower returns does not change their confidence.

In other words, the overly confident investor is always confident whether winning or losing. And men don’t have a monopoly on excessive confidence:

Free trade can't help a socialist nation

Good economists, that is, free marketeers, are appalled by Republican nominee for President Donald Trump’s attacks on free trade. All of us have examined and approved David Ricardo’s theory of trade and comparative advantage. Trade is not a form of war. Exports do not enrich a nation any more than imports impoverish it. It does not matter if the trading partner isn’t playing “fair.” Trading even with a communist country will benefit the home nation.

As Mises wrote in Omnipotent Government, “...the inference from Ricardo’s free-trade argument was irrefutable. Even if all other countries cling to protection, every nation serves its own interest best by free trade. Not for the sake of foreigners but for the sake of their own nation, the liberals advocated free trade (OG 75).”

What the market has in common with Trump

Watching this market is like watching Trump’s candidacy. Everyone is waiting for both to crash and burn but they keep climbing to greater heights. Even Fox News appears to oppose Trump without much effect just as the stock market sets new records in the midst of gloomy economic news all around.

The market has set new records even as profits are expected to have fallen for the fourth consecutive quarter. Earnings season is upon us and we will soon understand how bad the damage in the second quarter was. Thomson Reuters has predicted that profits in Q2 will be down about 5% from the same quarter last year. Revenue will have fallen 0.8%. It blames oil prices, low interest rates, and a saturated cell phone market.

The View Through Copper Colored Glasses

If you own a sailboat you know that copper infused paint protects the hull of your boat from barnacles. Plumbers like copper because it kills bacteria. Copper may also be good for your portfolio. To understand why, we need to keep in mind the method the National Bureau of Economic Research uses to define recessions.

The NBER waits until after GDP falls for two consecutive quarters. The lowest quarter becomes the bottom or end of the recession. The next quarter is the beginning of the recovery. Then the NBER gnomes crawl backwards through the data to find the most recent peak of GDP growth. The quarter after marks the beginning of the recession. So we don’t officially learn that we are in a recession until the recovery starts, sometimes 18 months after the recession has begun.

Swedes help with timing

Anyone not a mainstream economist has recognized the awesome blindness of the profession to the approach of the latest financial crisis and its impotent policies afterwards. I recently finished a book published last year that not only explains why mainstream economics failed but promotes good economics, the Austrian kind, and provides another tool for telling the future.

Thomas Aubrey, the author of Profiting from Monetary Policy and founder of Credit Capital Advisory in the U.K., consults businesses on how credit creation affects global asset prices. Aubrey begins by detailing the devastation of the crisis on pension funds. Not only did many funds lose money in the crisis, but the low interest rate monetary policies intended to restore the economy have inflicted more damage and will lead to many failing in the future. Aubrey doesn’t mention the life insurance industry, but it and millions of retired people are suffering for the same reasons.

The View from Vienna on Interest Rates and the Stock Market

Interest rates have some impact on the stock market because if investors can earn a better return in bonds than in the stock market and with less volatility they will sell stocks and invest in bonds. A large part of the recent record highs in the stock market reflect the Fed’s squashing of interest rates. The Fed wants to punish savers and reward debtors.

Interest rates have been falling since the early 1980’s to near zero today. According to the Financial Times columnist, Gavyn Davies, my main source for what central bankers are thinking, the International Monetary Fund identified three main reasons for the decline depending on the period:

1. In the 1980’s and 1990’s Fed inflationary policies caused the drop.
2. Since 2008, businesses have quit investing.
3. 2002 – 2007, the savings glut from emerging markets kept rates low.
4. Since 2000, portfolio shifted to bonds because of two stock market crashes.

Krugman advertises ignorance

ABCT Investing is based on the Austrian business cycle theory, so I become mildly concerned when others criticize the theory. I never become seriously concerned because I have learned over the years that most critics are unbelievably lazy. If they bother to read Mises or Hayek they do so through the lenses of mainstream econ and fail to understand what the authors are actually saying. 

The Social Democracy blog has posted a long diatribe against Ludwig von Mises, which I would normally ignore had Paul Krugman not advertised it. Krugman even gets wrong much of what the blog says, but the blog gets a few things wrong so here are my responses:

Natural rate of interest

The blog is right that the “natural rate” of interest doesn’t exist. Of course, neither does “equilibrium.” Both are theoretical constructs to help us think about economics. Wicksell defined the natural rate as the rate of interest in a barter economy. Interest would exist if we were forced to barter goods because interest is nothing but the opportunity cost of giving up the use of something for a period of time. Austrian economists picked up on the idea as a useful way to explain how interest under barter differs from interest using money. It’s a teaching devise. But if you don’t like it you can ignore it. It helps teach the ABCT, but has little importance to the working of the theory.

Mises and fascism

Size Matters

Size matters in investing as much as in other human endeavors. Bigger is better for most activities; Goliath usually defeats David. But financial economists have known for decades that small is the new big: investing in smaller firms increases investor returns a great deal over investing in the Blue Chips. Eugene Fama had to add firm size and value investing, to the Capital Asset Pricing Model to make it work. 

Recently the journal of the American Association of Individual Investors carried an article in its January issue on the subject of firm size, “Exploiting the Relative Outperformance of Small-Cap Stocks” by John B. Davenport, Ph.D., and M. Fred Meissner. The conclusions are striking:

• Small caps outperformed large caps 51% of the time between 1926 and 2012, but realized a cumulative excess return of 253%.

• Investors have higher probabilities of capturing small-cap excess returns in times of economic expansion immediately following recessionary periods.

• Small-cap sectors realize higher returns than large-cap stocks when the large-cap sectors are in favor.