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.

10 thoughts on “Keynes and Cigarettes

  1. kris says:

    One of your early posts gave a great tip that open up new roads for me: Think of the market as a microbiological system, everything mutates fast into other things.

    I am an engineer, STRUCTURAL THINKING is my thing. I read everybody but draw differnt conclusions from the same facts. Ray Dalio tremendously helped me to initiate to create a structure, but I applied your tip into that structure.
    However Dalio and Bill Gross are top predators, similar to the Rothchild of the legend about being the first to know Napoleon’s defeat thus suckering everybody at the London’s exchange.

    Fiscal cliff is a distraction. I don’t pay attention to it, hence I understand what it is perfectly well. It’s nothing.

    • Interloper says:

      Fair. Fiscal cliff is symptom, not cause.

      • kris says:

        By the way. It’s time I thank you for that “microbiological mutation” concept you shared here. Following Dalio’s thinking I was creating a structure on my own but I was stuck with the question: What is money?
        That concept resolved a lot of things: Money mutates into different forms at unpredictable times just like a swine flu. It was marvelous.
        Thx a lot.

  2. […] Thought of the day: 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. (Interloper) […]

  3. Andrew says:

    Kris, would you mind elaborating on your conclusion as to the nature of money? Thanks. in advance.

    • kris says:

      Thx for asking. Your request is very humbling. Good question because I had never thought of putting together all I’ve learned into few short lines, Dalio style. Just started working on it. Thx again for asking.

    • kris says:

      My up to date conclusions.

      – All money is fiat money = The rule of law, hence Money = Rule of Law.
      – Any civilized society requires some kind of central gov and requires money.

      Mutations of money:
      – Money = Unit of account
      – Money = Claims on somebody’s else products or property.
      – Money = Capital with time limited value = Always carries interest
      – Money = Credit or Debt all the time
      – Money that carries zero % or negative interest rate is no longer money, it’s something toxic that nobody wants to use as any of those mutations mentioned above.
      When the gov plays with the unit of account problems arise.

      – There is no such thing as retirement savings.
      – There’s no such thing as unlimited store of value.
      – Money as capital always has time value and time expiry period, hence interest rates cannot be zero or less. At zero or less%, the money has expired.

      Money mutating as store of value is the core problem of western civilization. The whole western civilization’s social fabric is based on this fallacy.

      Store of value and retirement savings are idolatry ideas related to gold as non corrosive element.
      Nothing consumable in nature is non corrosive, hence saving now to spend it 30 years from now is unnatural.

    • kris says:

      I’d appreciate your feedback.

  4. William52 says:

    “But to side with White and other Hayekians feels too much like a moral “eat your vegetables” argument rather than an economic one.”

    Odd comment. To use your smoking analogy, to side with the advocates for “stop smoking” feels too much like a moral “eat your vegetables” argument rather than a health one.

    Of course White and other Hayekians are making economic arguments. Destroying GDP with fiscal and monetary policy is first and foremost an economic issue, the moral issue being whether GDP destruction is a good or bad policy.

    • Interloper says:

      Ok, I see that. but again, that part of the argument is all about time frame. Stimulus fans likely feel that it is immoral to not help the currently unemployed in 2013. This is why we are talking over each other, not negotiating.

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