Book Review: Mobs, Messiahs and Markets

The publishers of Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics (Wiley, 2007), were kind enough to send me a free copy to review.

I’m glad they did. It was an excellent read, similar in some respects to one of my all-time favorite investment books: Extraordinary Popular Delusions and the Madness of Crowds, which delves into human psychology and crowd behavior. Mobs, Messiahs & Markets is like a modern-day version with emphasis on investing and explores popular delusions like “real estate never goes down”, “stocks always go up”, “deficits don’t matter”, “you are either with us or against us”. When rational, intelligent human beings become part of a group, they are fine. However, as soon as they become part of a crowd, they lose all rationality and turn into blockheads! I found the book quite entertaining, with great wit and sarcasm to keep me amused.

The book talks about people who were determined to make the world a better place by making it conform to their delusions. The authors also talk about how crowdthink leads to wars and how wars are futile and never worth the cost. There’s also a complete chapter making fun of Thomas Friedman and his banal book “The World is Flat”. I never liked that book and apparently neither did the authors.

There’s also a full chapter devoted to Alan Greenspan which was particularly eye-opening. It describes how his cowardice was responsible for the mess we’re in today. He exchanged his ideals when he went to Washington for fame and fortune. In his younger years, Greenspan apparently once said “In absence of the gold standard, there is no way to protect savings from the confiscation of inflation…The financial policy of the welfare state requires that there be no way for owners of wealth to protect themselves“. But once in Washington, he turned on the credit spigot and inflated the money supply tenfold.

The end of the book explains how you should ignore the popular beliefs and learn to think for yourselves if you want to invest profitably. They also caution against buy and hold investing. There is no such thing as buy-and-hold, you are either long or short an investment. If you are in cash, then you are long currency and short stocks, and vice versa. In the current economic climate they encourage going long Gold and short the US Dollar, which they think will fail like all fiat currencies before it (there’s actually a pretty extensive list of defunct currencies on page 256). As they say, gold isn’t a typical investment, but it's more of a store of value. Since the value of the dollar is about to be destroyed, it makes sense to load up on gold.

Overall, it was a very interesting read. The first half was a little excessive in its mockery of public figures and events. But the latter half more than made up for this by explaining how the government and various financial institutions swindle the common public. I plan on re-reading it for the sheer entertainment value alone.

This book is available from Agora Book Publishing.

Comments

[aarc:]

Good article?

Don't buy and hold stocks when they are selling at prices never been seen in more than 30 years?

Do you call 1932 as the death of buy and hold when the Dow Jones dropped 89% to $42 per share? It went up from $42 to $12,000 per share from 1932 to year 2000. Stupid buy and holders of Dow Jones stocks?

That author must already be a part of the panic crowd selling stocks right at the very bottom of the pit. I'll buy and hold some more of the stocks he is selling. Who knows if I will have to wait another 8 decades before we can have another "economic crisis of the century".

History repeats itself, or at least rhymes with the past, is'nt it. Learn from history - there will be booms and busts but there will be lots more booms than there will be very few "crises of the century". How many times in your lifetime will you be able to experience an economic crisis of the century similar to 1929/32 and 2007/09?

Look at the Chineses, they look at crisis as an opportunity - they buy and buy when the prices of commodities are at an all time low. Are'nt the Chinese and the Americans have opposite logical mentality on many things in life? They have different tastes too. Who looks stupid now buying oil feverishly for SPR near $147?

Buy gold now that the price has gone considerably high and with the gold bugs starting to become "irrationally exuberant' due to perceived threat of inflation while deflation is the bigger threat?

Who's got the knowledge and experience fighting deflation? Japan. Who'd have been fighting inflation for decades? The FED and European Central banks.

Where are you going to place your trust? A Fed with no deflation firefighting experience - or a Fed with proven experience fighting and winning against inflation for decades?

Mar 28 11:26 AM

[bearfund:]

aarc,

While I'm neither as bearish on stocks as the author nor as bullish as you, I think you need to look a little more carefully at your assumptions. If you bought "stocks" in 1932 and held them until today, you would have capital assets worth 185x as many dollars as you paid for them (not including dividend reinvestment or withdrawals, which matter a lot more than you think). However, you would need to discount those dollars by 44.75x to account for the dollar's loss of purchasing power over that time, leaving you with $4.13 in purchasing power for every $1 in purchasing power invested in 1932, for a real capital appreciation of 1.86% per year. Unfortunately if you sell your stocks now, you'll lose 14.9% of your nominal assets, so you'll be left with only $3.51.

Clearly it is a huge mistake to ignore dividends; nearly your entire real return comes from those payouts. This makes sense; the whole point of a business is to generate income by creating value. Had you simply left your money in gold (the default asset and the only one which is free of all risk - and all return) since 1932, you'd still have $1 of purchasing power for every $1 you had then. The difference between 0% and 1.86% is very small indeed. It's the 2-6% in dividends you give up by not taking risks that really hurts you, especially if you would reinvest those dividends.

Your comment also assumes you bought stocks at the bottom in 1932 and not, say, 1930 or 1927. It's always possible to cherry-pick timeframes that only a very few investors were prescient enough to choose. In the real world you bought stocks in all those years and others as well (like 2000 and 2006), and your real capital appreciation is probably zero. In other words, the only difference between dollar-cost-averaging into a large assortment of stocks and simply holding gold is exactly what we should expect it to be: the aggregate value created by the corporations you held over the entire time period, which was paid out to you in the form of dividends. The capital assets - plant and property, etc. - wear out and are depreciated, so they do not account for any significant growth even though they appear on the balance sheet. Brands and other intangibles ebb and flow and are largely a zero-sum game, so they too cancel one another out when indexing. All you're left with is the income. And this turns out to be exactly what we see.

So when you choose between gold and "stocks", you are simply deciding whether the income those stocks offer you justifies the risk of loss of capital. If your horizon is truly infinite and your ability to evaluate individual investment opportunities nonexistent, then by all means trade dollars for stocks continuously and reinvest the dividends, regardless of price or apparent risk. Those of us who are both mortal and sentient have more difficult choices to make. Like whether to take risks at all, and what those risks should be. A 3.2% yield is only a little low by historical standards, but the risks of investing for that 3.2% today are (in my opinion) higher than the historical norm. The gravest risks are hyperinflation and political confiscation, and the nature of these risks increases the yield I require to make that investment. Prices will have to fall, or those risks decline, before I consider making larger investments in equities as an asset class.

As for the Fed, there is no deflation ("decline in the supply of money") and never has been. In the last 12 months the money supply has increased by more than 100% according to the Fed's own statistics. And the Fed has no serious experience limiting either inflation or price increases; for the first 58 years of its existence the dollar was pegged to gold so inflation showed up not in prices but in the calling away of gold by foreign central bankers. And in fact this is exactly what happe ped. Once that peg was removed, prices spiked dramatically until 1982. Since then inflation has been "moderate", around 15% per year, and prices have been rising "only" around 8-10% per year. That's hardly what I'd call an impressive track record, especially given that between 1810 and 1905 prices fell, inflation was less than 5% per year (most of that in the 1850s and 1860s during the western gold and silver booms and the war between the states), and total economic output exploded as the United States transitioned from a minor rural nation to a global powerhouse. Economic performance and the cost of living during the Fed's 96 years have been... less impressive to say the least.

Face facts: central banking and fiat money don't work. They exaggerate natural boom/bust cycles, transfer wealth from producers to bankers, and destroy the savings of ordinary working people. Until they are removed and replaced with sound money and honest banking, every financial asset on the planet is a conviction sell. If you want me to buy more stocks, you know what to do. Until then, I'm sticking with metals.

Mar 28 04:07 PM

[pelican:]

bearfund,

Some of what you say is puzzling and this sentence I don't understand at all. "...prices spiked dramatically until 1982. Since then inflation has been "moderate", around 15% per year, and prices have been rising "only" around 8-10% per year."

Here is an inflation by decade chart.
inflationdata.com/infl...

Mar 29 03:34 AM

[Living Off ...:]

the book came out last year before the market crashed. I was supposed to review it 6 months ago, but I've been slacking!

Mar 29 05:19 AM

[sticktoitiv...:]

bearfund
"there is no deflation ("decline in the supply of money") and never has been"

The deflation was caused by the slowing of the velocity of money (how fast money changes hands), not the supply of money.

Mar 29 09:07 AM

[bearfund:]

@pelican: That chart's methodology isn't documented but I can tell you right off that it's not measuring inflation. Perhaps it's measuring prices (of what though?). They're not the same thing. Reasonable measures of dollar inflation include M3, MZM, and the size of the Fed's balance sheet. The CPI-U, PPI, and similar indices do not measure inflation; they measure certain subsets of prices. In particular the CPI-U is used to deliberately understate prices to limit the government's Social Security and TIPS obligations (but even with this deliberate understatement it has continued rising throughout the past year).

@sticktoitiveness: Velocity can affect prices temporarily but it has nothing to do with the money supply's actual size, which is what determines whether inflation, deflation, or neither is occurring. That money exists; whether anyone is spending it is irrelevant to its value just as the market's demand for your favourite stock at any point in time is irrelevant to the value of the businesses it represents.

Remember, price is what you pay; value is what you get. The price of money is simply the inverse of the prices of goods and services; the value of money is the total goods and services it can buy divided by the amount in existence. These have become disconnected; the value of the dollar has fallen by over 60% as supply has more than doubled while economic output - the stuff you can buy with those dollars - has contracted, while a short squeeze has driven up the price. Don't overpay for cash and don't listen to the fools; trust the data and your own eyes. The price of a condo in Miami has very little to do with its value, the value or price of the dollar, or anything else except demand. That demand at 2006 prices (and today's prices) is determined by the ability of individuals to live far beyond their means for an extended period of time; there are far too few people whose economic value can support those prices to take down all the available supply. Unsurprisingly, as a result that demand has fallen greatly. But none of that has anything to do with the price or value of the US dollar. Reality bites: there is rampant inflation and (separately) prices of the goods and services people need to live are rising.

Mar 29 08:45 PM

[sticktoitiv...:]

bearfund,
Long term I agree, even though the the velocity of money can slow permanently it probably won't, but I was writing of the recent past not the long term.

Mar 30 02:23 PM

[Rondeann:]

This book is 90% sarcasm and 10% something else. I don't know what the 10% is but it's not useful information. But I may be unfair since I quit reading half way through.

Apr 20 08:22 AM