Investing in the World of Dr. Mabuse
How do we measure 'profits,' asks Sean Corrigan, when the vast quantities of money and credit are being poured into our domestic economy, so artificially boosting revenues, and when foreign exchange parities gyrate so wildly as a result? How do we compute the likely worth of an earnings stream when, on the one hand, all manner of material inputs — and needless regulatory costs — are so volatile and, on the other, final selling prices are being distorted both by over-cheap finance and by widespread mercantilist intrusions? FULL ARTICLE
Comments (19)
Roughly speaking, what this is highlighting is when inflation becomes hyperinflation - when the signal to noise becomes too poor to make the adjustments needed. Before that stage, you apply prudent estimated discount factors. After that stage, you can't make good enough adjustments and you are in the wrong business - you should be into rent seeking, collecting the wealth being pried loose from others. Historically, above 10% per year inflation indicates you are in dangerous waters, and above 20% shows it is too late for you to get into rent seeking (others have beaten you to it).
Published: October 17, 2005 12:39 AM
"This way, we create yet another high spending class of the newly rich among the traders and the derivative salesmen, the M&A specialists and the corporate lawyers, the private equity partners and the hedge fund hotshots."
Would these activities become less profitable in a world of "real" money?
Is their existence a bad thing under a central bank fiat-money system? Are they part of the problem, or a way to mitigate some of the negative effects on the victims of that system?
Why weren't investment strategists and stockbrokers included?
Published: October 17, 2005 6:04 AM
Yes, with 'real' money there would be less focus on financial engineering and more on the kind which wields a spanner or shovel, to the undoubted benefit of all.
'Real' money would obviously not preclude all financial speculation, but, with such money being much more hard-won and so more closely shepherded, it would greatly limit such speculation's extent and so bring it into a much healthier balance with the entrepreneurial kind than that which presently obtains.
No, these inflationary fauna decidedly do not mitigate the problem - whatever fatuitites Greenspan may utter about their supposed beneficial role in 'unbundling risk. {For example, see the article entitled "Who's holding the bag?" at www.cfo.com)
Rather, they render balance sheets less transparent; they promote endemic capital misallocation; and they make pricing based on real-world supply-demand, rather than on the whims of casino finance and the fickle herd instincts of the leveraged hoi-polloi, highly problematical. (Additionally, many of them grow fat by assisting Leviathan in funding its welfare fantasies and by underwriting its intrusions upon our liberties).
Granted, stockbrokers could well be included on the list, especially those likely to be compromised by their association with the giant 'product' engines of Wall St and elsewhere, and as long as we remember that here, as above, we are generalizing about an over-populated class, not casting aspersions on the many diligent individuals nonetheless honorably employed within it.
Mere investment strategists, however, usually represent a much more humble breed.
Of themselves, they typically dispose of little more than the puny power of persuasion, as opposed to these other types who can deploy essentially unlimited financial resources everytime they wish to place a bet.
Some of the tribe of 'strategists' are even Cassandras who write articles on scholarly websites in which they actually decry modern day trends, and who spend their professional energies trying to advise on how best to spare their client's monies the worst of the havoc such vicissitudes can wreak.
Published: October 17, 2005 7:04 AM
Mr. Corrigan writes: “For, in a world in which, as we have argued, our yardsticks are suspect and in which we know our scales to have been falsified, it is even more difficult than usual to separate the real from the unreal, the honest from the deceitful, and the lasting from the momentary—all tasks vital to any honest investment process.�
I would add that this passage points to the broader conclusion that all economic activity under the division of labor, not only the investment process, requires stable money, because without stable money economic calculation, and hence, rational economy is impossible. When the purchasing power of money is not relatively stable, its use as the instrument of economic calculation is impaired, and under hyperinflation is destroyed. The result is calculational and economic chaos. Leaving aside the important redistributive and ethical questions, the problem with inflation from an economic standpoint is that it hampers, and can eventually destroy, economic calculation. I believe this message is a significant aspect of Mises’s economic thought.
Published: October 17, 2005 9:13 AM
I think Sean Corrigan should get a job, a real job, before it's too late. How about a strip joint barker that would showcase his real talents and he could massage something real all day instead of statistics. Wholesale prices are at history of capitalism lows! They are below Great Depression era lows. Sure there's inflation for salaries of baseball pitchers, and corporate ceo's and the Hollywood halfwit crowd, but for the 90% of the rest of the world who are producing commodities their children are eating dirt for breakfast.
Published: October 17, 2005 10:19 AM
It's distressing to me that Alan Greenspan once was one of us. I read an article he wrote in an Ayn Rand book published in the late '60's on the necessity of returning to a gold standard and the dangers of inflation. I wondered what turned him?
That a gold standard would not eliminate crises is shown in "Manias, Panics, and Crashes: A History of Financial Crises" by Charles P. Kindleberger. Still a gold standard would help. The next thing we need to control is fractional banking, for as Kindleberger shows, a sudden expansion of credit under a gold standard with franctional banking can create chaos.
Published: October 17, 2005 10:20 AM
The problem with the traditional gold standard is that it allowed for fractional reserve banking and therefore undermined the very purpose of using gold as money in the first place. Although it did provide a modest check on money creation, it sowed the seeds of its own destruction. If we are ever to have truly sound money, we must first rid ourselves of the fraud that is fractional reserve banking.
As far as what turned Greenspan, well power and fame of course. Even the best and brightest fall prey to the siren song of power. Which is why I think Mises's life and career was so remarkable. He could have caved in, ceded his position to a small extent and received payed professorships, awards and lots of recognition. Instead he stuck to his guns.
Published: October 17, 2005 10:31 AM
Tim:
Look at housing prices, food, building products, property/casuality insurance, medical costs, fuel, and labor to name a few.
If you live in an area where the above are falling, I will move there.
The low inflation your speaking of only comes from the mouths of fed officials and the sycophantic press.
Published: October 17, 2005 10:41 AM
"Even the best and brightest fall prey to the siren song of power. Which is why I think Mises's life and career was so remarkable. He could have caved in, ceded his position to a small extent and received payed professorships, awards and lots of recognition. Instead he stuck to his guns."
Aaron's comment regarding Mises is right on the mark. I would add the same could be said for Murray Rothbard, although Rothbard's life was not in jeapordy as Mises's was due to Nazi expansionism or the possibility of Mises ending up in Soviet labor camp.
Published: October 17, 2005 10:48 AM
I agree with your way of thinking completely, and furthermore I think going back to gold standard and/or precious commodity-based currency will eventually will fix most of the problems that you cited.
Governments won't be able to issue as much paper as you like, borrowing will also get disciplined, consumption will subside, and so forth.
That's my take. With current set of currency standard - fiat money - nothing will fix things.
Simply, if one knows he can print some extra paper and get real goods and services in return - what would stop him?
And EURO will fail just like dollar, even if all OPEC switches to it. That's paper.
Paper is the root cause of MOST economic problems I think.
There is a myth in my country, and it goes a brave man decides to rid his town of an evil dragon. He fights the dragon with his sword 40 days and nights. But each time he cuts off the dragon's head a new one comes out. Then a wise man comes to him and tells to go to a remote mountain and find an eagle's nest in one of the caves, and pull out a huge egg and cut it in half - that's where the dragon's soul was.
The youth listens and finds the egg, brakes it apart - and the dragon dies immediately....
Along the same lines, I think the the soul of this dragon economy is in the fiat money structure.
Thanks again,
respectfully,
mr
Published: October 17, 2005 10:58 AM
This is an exceptionally descriptive article! One of the best I’ve read about the economic situation in America. For lack of a better term, I’ve been using “reverse inflation� to describe prices becoming lower in many sectors but average incomes dropping further creating less buying power. The middle class is virtually gone. Well, we were too uppity anyway.
This article also describes quite well the fact that the stock market is nothing more than a grand casino. Gambling is the activity, not investing based on productive company activity. How different the scenario if there wasn’t a tax system to milk! Companies would actually have to figure out how to make real money.
It appears that, as usual, the odds favor the “house� (The State of Working America 2004/2005, by the Economic Policy Institute):
“Just over half of Americans are invested in the stock market, with only 40.1% having more than $5,000. The distribution of stock ownership (whether directly or indirectly through mutual funds or 401(k) or IRA accounts) is even more highly skewed, with the top 1% of wealth holders owning 33.6% of all stocks, while the bottom 80% own a mere 10.7%.�
Another great point made by the author is the complexity of the system. I’ve been reading some highly instructive materials recommended by bloggers at this site. From what I’ve read thus far it’s difficult for me to understand how the economy has not already collapsed, not just in America but elsewhere as a consequence. But the author has described some of the methods used to keep the whole mess going forward. What is the plan of the self-proclaimed “aristocracy� to keep it going indefinitely? Those in charge are corrupt and devious, but they aren’t stupid or blind to the potential consequences of taking this road. What am I missing?
Also from State of Working America 2004/2005, by the Economic Policy Institute:
“The tax cuts that took effect between 2001 and 2003 exacerbated the income gap by redistributing income from lower to higher-income households. The tax savings from those cuts for the top 1% was about $67,000 per household, for middle-income families the cuts added up to just under $600, and for the bottom 20% of households, the average tax saving was $61. The result has been to shift 0.8% of after-tax income from the bottom 99% to the top 1% of households.�
Is it possible that collecting wealth into a miniscule group while holding incomes down for the masses will permit the miniscule group to join forces with other such miniscule groups in other countries to manipulate monetary values such that the game can go on indefinitely?
Published: October 17, 2005 12:34 PM
Tim,
I too am one that you would probably tell to get a real job. I don't think you appreciate how difficult a job it is to advise others on their investments.
One thing I know for sure; Sean Corrigan knows what he is doing. A quick check at Sage Capital's website will tell you that even with the headwinds discussed here, their Edelweiss Fund is having another fine year.
Published: October 17, 2005 12:49 PM
ATTENTION SEAN !
it's "jeunesses DOREES" , NOT "d'orées"...
please do not mistreat la langue de Molière.
Merci et bonsoir.
Published: October 17, 2005 1:20 PM
"Wholesale prices are at history of capitalism lows! They are below Great Depression era lows."
I do not have the wholesale price indexes for the past 70 or 75 years in front of me, but I find this statement hard to believe. My understanding is that wholesale prices generally are substantially higher today than they were during the Great Depression.
Published: October 17, 2005 1:57 PM
Dennis,
I believe this reference to wholesale prices is another talking point that's been used extensively lately. It sounds good if other information is left out relating to unemployment, overall income reversals for the teeming masses, and various other minor details.
Wholesale prices don’t mean much anymore, it seems to me, at least in comparison to what they meant historically. Maybe measuring how many loaves of bread can be purchased with one’s income is the most accurate method. In that case, the value of my income is far less than 5 years ago. And I’m far more concerned about now and the future; the Depression is valuable for its lessons, even though they’re not being heeded.
Published: October 17, 2005 2:37 PM
The Dr. Mabuse association is brilliant!
I've also long thought a great association is the upside down world of Alice in Wonderland: The faster you run, the slower you go!?!
Well, how about, the faster you consume and pile up debt, the better your economy, and the richer you become! ...or, the more you save, the poorer you are!
Published: October 17, 2005 4:35 PM
Socialism can't work because there are no prices to transmit information. But noise fills the "mixed" economy which introduces an error term which eventually expands so that even good companies go bankrupt, and really bad ones win the regulatory-taxation-interference lottery.
Published: October 17, 2005 9:01 PM
Excellent comments all around.
When history has shown the pitfalls of adopting fiat currencies and and the evils of fractional reserve banking. One begins to question the brilliance of todays power and money brokers.
Could it be that they know exactly what they are doing?
I know of Greenspans essay on gold that he wrote in 1966. Someone wondered what could have turned him. But did he turn? He more than likely holds the same opinions but there is an objective to be obtained in the current economic course.
We have a choice of what to believe. Our brilliant economists running the system are not so brilliant, or they are on a planned course of super-control and tokens will forever be used instead of "money".
Published: October 18, 2005 9:31 AM
I am torn and have been for sometime whether to prepare for inflation or deflation. Each can be very devastating. I lean toward preparing for inflation and I have tucked away accordingly. However, I fear for my pension from Texas Teacher Retirement System, currently actuarially underfunded and with talk of no raises this decade, so inflation is eating away at my sustenance. Should we suffer deflation the benefits from the system would be in jeopardy. Oh what to do???
Published: October 20, 2005 10:05 AM