Monthly Archives: December 2012

Keynes and Cigarettes

Every important argument in investing can be reduced to time frame, the speed at which returns can be earned relative to the amount of risk accepted. The now-somewhat disgraced Charles Brandes had the perfect synopsis of this:

What growth investors pay in valuations, value investors pay in time

In other words, growth investors want their returns quicker and they are willing to take on more risk in terms of valuation levels to get it. Value investors, more risk averse, are willing to wait longer.

Psychologically we could build in a marshmallow test/delayed gratification/maturity equation from this, much to the glory of value investors. They would come out as the adults while technicians look like the little kids who refuse to eat their vegetables (fundamental analysis) and want to start the meal with dessert.

If we pull back from the comic dysfunction of Congress it is also possible to frame the fiscal cliff bunfight in terms of time horizon. The Keynesians are the ones in a hurry – the economy needs help now and anyone working to delay huge stimulus is cheering on the starvation and general dissolution of the unemployed. Europe, particularly Greece, is clear evidence that supporters of American austerity at this point are out of touch whackjobs. For most of them, unfortunately, “whackjobs”  seems a charitable description.

Not every opponent of mass fiscal and monetary stimulus are froth at the mouth morons  though. Ray Dalio, for one, thinks the Fed is tapped out and blowing up their balance sheet for diminishing returns is an exercise in economic tilting at windmills. Economist William White, whose criminally under-read paper Ultra-Easy Monetary Policy and the Law of Unintended Consequences got me thinking most about this issue, is another.

Unlike the Keynsians, Dalio and White are less concerned with economic growth next year than the sustainable growth rate five years from now. For them, and admittedly I’m extrapolating here, maximizing economic growth for 2014 through government spending will only increase the eventual hardship, for a far greater number of people, in 2018 or other later date.

For the more sensible of the non-Keynesians, more monetary policy that threatens government fiscal health can be compared to smoking cigarettes. (The Japanese fit in here hilariously – “I dont have to quit smoking, that old Asian guy down the street’s been smoking 2 packs a day for 50 years and he’s still alive.”). Entitlement spending needs to be reigned in in the same way a smoker knows they have to quit. But maybe next year.

Ok, so the metaphor’s not perfect. Unless you want to include the dopamine release that comes from nicotine addiction, cigarettes have no constructive benefit whatsoever while there is ample evidence that stimulative fiscal and monetary policy does. In some ways obesity would work better – food, after all is necessary and constructive in moderation and the current epidemic of fatness raises all kinds of attractive metaphorical possibilities. But the health risks of obesity lack the “wake up one morning and you’re fucked” immediacy of lung or throat cancer, and potentially, a lack of faith in greenback and/or Treasury market.

Honestly, I don’t feel qualified to argue either side here. White’s paper – which focused on the longer term sustainability of subsidies for the auto and agricultural industries – did get me to think about it more. But to side with White and other Hayekians feels too much like a moral “eat your vegetables” argument rather than an economic one.

I also read Dalio’s Principles recently, his general recipe for life success. He emphasized the importance of looking past “first order problems”, using the time sink of physical exercise as an example, and focusing on second order benefits – the added productivity of physical health. This thought as it applies to fiscal cliff economics is harder to shake.

Kevin Ferry wrote a great post equating the current American political debates, in economics, social policy and everywhere else, as indicative of America’s adolescent stage of aggregate maturity. With this in mind, I can’t help but remember that one of the primary signals of maturity is the ability to think longer term – Dalio’s urgency about second order benefits.

Again, I won’t suggest that i know enough to tell you what mature economic policy would look like in this sense although certainly entitlement reform is part of it. But I do know that adulthood involves difficult choices when you realize you can’t just do whatever you want.

Finance Mythology

I think I’ve found a thread through yesterday’s shooting, economics and gender politics. Its actually a lot less impressive than it sounds. What we’re going to deal with – collective mythology – runs through everything but still, in the immortal words of Crash Davis, “we’re dealing with a lot of shit here.

Before I lose any more readers let’s quickly establish the link between myths and economics because few things are more collectively expensive than maintaining mythologies. Why do you think defense contractors get away with charging $2500 for a bolt? Complaining about it interferes with the myth of “America, the most powerful country in the world”. The disgusting morass of agricultural subsidies is politically ringfenced by the Faulknerian Pastoral Legend of The American Farmer.
This mythology shit is expensive.

Mythologies compete, too, and the arena is politics. Politics is merely the art and science of packaging mythologies into consumable portions. There is more myth in the phrases “American Values” and “Social Justice” than the Illiad and the Odyssey combined. Note also that the two examples above conflict with the myth of Free Market Capitalism.

“But wait”, you object. “America is the most powerful country in the world. Its not a myth.” That’s because you are misusing the word, or at the very least treating it disrespectfully. Real myths are more true than almost anything else. Why do you think they’re kept vague? Like newborns, they are way, way too important to be brought out into the sunlight, subject to the elements and dissection. Northrop Frye (on the short list of “Non-Hockey-Playing Canadians of Which We are Most Proud”) puts it this way:

Persecution and intolerance result from an ideology’s determination, as expressed through its priesthood, or whatever corresponds to a priesthood, to make its mythological canon the only possible one to commit oneself to, all others being denounced as heretical, morbid, unreal or evil. This means that there is a strong resistance within an ideology to placing its excluded initiative, the myth it lives by, into focus and examining it in a broader perspective. (“Words with Power, p24)

Try this. Grab a pen, unstrap the Rolex and put it on the desk where you can see it. Now give yourself 30 seconds and write down the ten words that best describe the financial industry. Don’t think, just write.
There’s your Finance Mythology. There will be plenty of overlap with other industry people, but its yours. Everyone, as Bellow wrote, has his own book of poems.

The Fly gave me the link between this, Newtown and finance. His appropriately somber and respectful post yesterday concludes thusly:

This country is diseased through an acute lack of morality and integrity. Everything about America has become rotten to the core. I am disgusted by this news, but also saddened for what it says about us.

The thing about the Fly is that for all his derision and highly entertaining trolling he is by far the most transparent money manager on the Internet. Every single trade and why, including losers, for free. Why would he do this?

I’m guessing, but would be willing to bet, that LeFly’s 10 words about finance focus on its more helpful aspects, the “helping clients achieve their financial goals”. With this interpretation, his hilarious dickishness is just a cover for the fact that he’s being helpful despite the fact he’s convinced the world’s going to shit. This takes belief.

Technology and social adaption are threatening any number of mythological structures. I deal with the slow, painful death of The Cult of Good Journalism every day. The average  dude is struggling with the Death of Manhood as prescibed by Hemingway, Emerson and our grimy, factory worker grandfathers.  (How, exactly we’re doing this is none of your business, btw – its The Myth, far too important for outsiders).

I’m not about to predict the future for the Mythology of Finance. Well, besides the part where demographics virtually makes it a certainty that it will be at least 30 to 40 per cent smaller as a percentage of GDP by 2030. But I am curious as to how it will happen. Let us not kid ourselves – money is how we value societal contribution and finance has most of it still. This, combined with the fact that the roots of the cult run deep – Smith, Hamilton, Morgan, The Industrial Revolution-led British Empire – suggests that a spirited defense, possibly a victorious one in the end, will be led.

But it is about mythology.

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