Austrian economics has its own contribution to make to the method of hedge funds. Mainstream methodologies insist on placing a time dimension on the cause and effect in any given economic situation, so if X takes place then Y will take place with a time lag of A number of months. The Austrian School holds that it is unachievable to regulate actions that are determined by human choice preferences into a fail-safe mathematical model. [Full article]
Source link: http://blog.mises.org/3322/the-method-of-an-austrian-hedge-fund/
The Method of An Austrian Hedge Fund
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When the money commodity in one geographical jurisdiction becomes too expensive, it pays for people to switch out of that commodity money and move into a cheaper one.
This doesn’t appear to make sense. The only reason to switch from one currency to another is a belief that the future relative exchange rate trajectories will favor the currency that you plan to hold.
Regards, Don
I believe he’s tryign to say that when one currency is too expensive (over-priced/over-valued) relative to another, it is reasonable to believe that a correction will take place, hence future exchange rates will favor the currency you plan to hold.
David,
I believe he’s trying to say that when one currency is too expensive (over-priced/over-valued) relative to another, it is reasonable to believe that a correction will take place, hence future exchange rates will favor the currency you plan to hold.
This is the same as saying that when gold gets up to $X an ounce you should sell. A relative trend will continue until it doesn’t. There are always restoring forces, but just when they become dominant is always a speculation.
Regards, Don
Over/under valued is the relationship between purchasing power parity and exchange rate. Imagine the market exchange rate is such that 1 “Don” can be exchanged for 1 “David.” However, I observe that gold is selling for 400 “Dons” per ounce in “Don-land” and selling for only 392 “Davids” in “David-land.” My incentive as a third party is to take 392 “Dons” and exchange for 392 “Davids”, buy an ounce of gold, then sell the gold for 400 “Dons”. I have made 2% arbitrage.
The greater the split between PPP and exchange rate, the greater the potential.
The REAL reason that monetary aggregates ceased correlation to national income in the early 1980′s is that the definition of national income has been a-changing. It’s actually quite laughable for “mainstream” economists to suggest that “financial deregulation” is responsible, since regulation only increases with time (this is sort of an inverse law of entropy with regard to government).
CPI is an important calculation, because it yields the “implicit price deflator” used to turn nominal measurements (like GDP) into “real” measurements. In 1983 the shelter component used to weight a homeowner’s expense was changed from actual purchase price to “owner’s equivalent rents” which stabilized and decreased CPI trend. This is only one of many changes to CPI over the years, but the pace seems to have accelerated starting in the 80′s. CPI has been increasingly less correlated with the real rate of increase in actual price level.
Since the real rate of increase in price level is a function of money supply increase, and since CPI (the “official” measurement of inflation in prices) is used to calculate “real” changes in the national income, it’s no suprise that changes in money supply no longer correlate with national income. It’s the national income calculation that’s changed, not the nature of the markets.
in understanding ‘the moving time dimension’, does that mean the Austrian Hedge Fund, or Austrian traders should not trade FX options?
“Moving time dimension” means that you can be absolutely right in the long term, but still get killed in the market ON THE SHORT TERM. You may be absolutely sure that, in the long run, the dollar may fall. So you go to Everbank and buy a 6-month Euro-denominated CD. But the dollar zigs and zags and you lose on the deal at the end of the six months. Disgusted, you put your money in dollars just to watch the dollar fall vs. the Euro a month afterwards. AAARGH!
This happens a lot in shorting stocks. Since it’s so much work to short a stock, generally the guys doing it have done their homework and are ABSOLUTELY RIGHT about the grim prospects for the company involved. However, in the short term, whatever mania/bubble/histeria/etcetera that drove the value through the roof may continue, and may continue long enough for the short to expire and the guy doing it to lose his @$$.
I’ll close with a quote from an article by Bill Fleckenstein. Before you read it, pull up a 10-year chart for the Nasdaq – which is still down from mid-1999:
http://moneycentral.msn.com/content/P85418.asp
“My observations in 1999 about what was happening and what would ultimately happen were fairly accurate. That said, the Nasdaq ($COMPX) doubled in the five months after my speech, making me look like a complete and total idiot, when, in fact, I was essentially dead right. This happens all the time. Markets tend to make you look the silliest just before they’re about to change.”
If one only simply needs to define the money supply as AMS, then one can determine the trend in foreign exchange – and the example given was the EUROUSD, where we suspect that the EURO is in for a major devaluation – what about Japan and Switzerland – how does this theory explain what has happened to the USDJPY and USDCHF over the past 5 – 8 years.
Why is it that the USDJPY and USDCHF over the past four years has been so weak [JPY and CHF stronger] when in both Japan and Switzerland the money supply [AMS] has increased by up to +25-30% for both countries – and the USDJPY since 2001 has fallen from 130 to 105 today, and the USDCHF has fallen from 1.6550 to 1.1650 today – when the money supply [AMS] in the United States has only averaged growth of 5% over the same period.
In Japan – the BOJ has been injecting primary liquidity into the banking system from 1998 in a series of defined monetary policies directives – such that the money supply for that period has been growing at an average 10.80% [between 2002 -2003 it grew by 35%] while for the same period the USA money supply grew by 3.00% [since 1998] – yet the USDJPY was at 145 beginning 1998 and is 105 today. Why is the JPY so strong against the USD.
Switzerland – since beginning 2001 the money supply has grown by 9% on average [in 20003 it grew by 26%], while the United States money supply grew by only an average 4.90% – yet the USDCHF was 1.6500 [end 2000] and now 1.1650.
So at least for these two countries the money supply has been running at twice/ three times the rate than the United States yet these country’s currencies have strengthened.
So what about interest differentials between these countries over this period:
Japan – since 1998 – 2001 there was a negative 6% interest differential in favour of the US and it is now running at a negative 3.00% [3 month LIBOR] in the US favour.
Switzerland – since 2000 to 2001 the interest differential was negative 4.00% [in favour of the United States] and it has been negative since then to now, where it is about negative 2.00% in favour of the United States – yet the USDCHF has devalued from 1.6500 to 1.1650.
So why are these two countries different if one simply looks at money supply growth rates and interest differentials.
Something more needs to be happening in these economies for this theory to work – some disconnect has occured as this theory doesnt seem to hold water for these two unless one suspects the time lags to be 5 years or longer.
That comes back to the role central banks play in determining the boom and bust cycles – they alone cannot create a boom, or determine the growth in the money supply – it is banks meeting the demands of businesses supplying goods and services to consumers that determines to a larger extent the growth in money supply.
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