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Former Tenured Business Professor; co-authored APICS textbook on organizational change; math/economics/science teacher; serious investor since 1987; completed the professional Certified Financial Planner course; and completing the Chartered Financial Analyst charter by progressing toward a... More
  • Caught between Keynes and the Deep Blue Sea Requires a Barbell Strategy 0 comments
    Sep 4, 2010 9:37 PM | about stocks: SPXS, MOO, UGL
    Elvis is dead, Keynes is too, and I'm not feeling too good myself!

    Unfortunately, Keynes ideas live on "loved tenderly" by statists who know what is best for you and me which is why I'm having such a blue, blue, blue, Labor Day

    Who are these know it alls? Start with Obama, proceed cautiously as you approach Pelosi and Reid, speed up around Bernanke, and go to warp speed when entering the Barney Frank Zone. They are all by training and indoctrination statists. Statists advocate the use of central power to achieve self-defined aims of political, economic, and social nature. Who can counter the argument that in the time since Obama was elected we have experienced a full frontal assault on the very pathos and idea of individual liberty and self determination!

    Some have begun to question the effectiveness of the massive bailouts, fewer, however, question the motive behind it. The motives that actuate such economic and socio-cultural suicide must now be challenged on every front. The economic chaos the world faces now is but a battle in a larger assault on all the blessings of liberty that have accrued to us over the past two centuries.

    Sun Tzu in the oldest known military treatise said:
    "Know the enemy and know yourself; in a hundred battles you will never be in
    peril. When you are ignorant of the enemy but know yourself, your chances of
    winning or losing are equal. If ignorant both of your enemy and of yourself, you
    are certain in every battle to be in peril."

    Keynes, a British economist who died more than 60 years ago, inspired President Barack Obama's plan to save the U.S. economy with a massive round of government spending. The British economist published his big theory, the one underpinning most of what Obama has been attempting to do, in 1936.

    John Maynard Keynes is an unlikely hero for our time as should be the case for anyone whose ideas have been proven to be as harmful as his.

    Who was Keynes and why is his death grip on fiscal and monetary policy stronger than at any time since the 1930's? To separate Keynesian economics from Keynes the person is to do a great disservice to a man who spent his life fixated on his own self.

    Yet a little known fact, or at least not often mentioned on CNBC et al, as they recklessly and fecklessly attempt to gain legitimacy by bandying Keyne's name about, is that this self-presumed giant of economic intellect completed only one term of his economics graduate program at Cambridge and gained a toehold there with no real academic credentials and worthwhile experience. Prior to his appointmet as a Lecturer, the lowest tenured academic rank in the U.K. below that of Professor and Reader! Even this modest appointment was a result of his father's influence. This is the fount from which all economic knowledge flowed for over thirty years until Ludwig Von Mises and Milton Friedman were shown to be right about the predictable inflationary effects of monetary and fiscal stimulus coupled with interference in the market place.

    It is safe to say that if Keynes had been an obscure economics teacher at a small, Midwestern American college, his work, in the unlikely event that it even found a publisher, would have been totally ignored some argue.

    Because Keynesianism in all of its insidious forms permeate the economic references of  Obama, Geithner, and Bernanke, their unbridled embracing of de facto statism while talking free enterprise should come as no surprise. Why? They are Keynsians and thus steeped in the hypocrisy and vacuousness of Keynes ideas.

    Why should this intellectual and ideological family tree concern us? From the scattered information now available Keynes was an enthusiastic advocate of the "enterprising spirit" of Sir Oswald Mosley, the founder and leader of British fascism, in calling for a comprehensive "national economic plan" in late 1930. The most convincing evidence of Keynes strong fascist bent was the special foreword he prepared for the German edition of The General Theory. This German translation, published in late 1936, included a special introduction for the benefit of Keynes German readers and for the Nazi regime under which it was published.

    The German introduction, which has scarcely received the benefit of extensive commentary by Keynesian exegetes, includes the following statements by Keynes: "Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a lance measure of laissez-faire."

    Indeed, Keynes had long been anti-Semitic. At Eton, Maynard wrote an essay titled "The Differences Between East and West," in which he condemned the Jews as an Eastern people who, because of "deep-rooted instincts that are antagonistic and therefore repulsive to the European," can no more be assimilated to European civilization than cats can be forced to love dogs (Skidelsky, 1986: p. 92).

    He nurtured an overweening egotism, which assured him that he could handle all intellectual problems quickly and accurately and led him to scorn any general principles that might curb his unbridled ego. The second was his strong sense that he was born into, and destined to be a leader of, Great Britain's ruling elite.

    Both of these traits led Keynes to deal with people as well as nations from a self-perceived position of power and dominance. The third element was his deep hatred and contempt for the values and virtues of the bourgeoisie, for conventional morality, for savings and thrift, and for the basic institutions of family life.

    Keynes was born under special circumstances, an heir to the ruling circles not only of Britain but of the British economics profession as well.
    The greatest impact on Keynes's life and values, the great conversion experience for him, came not in economics but in philosophy.

    Burke may lay strong claim to be being his political hero," writes Skidelsky (1983: p. 154). Edmund Burke? What could that conservative worshiper of tradition have in common with Keynes, the statist and rationalist central planner? Keynes venerated this man with a Keynesian twist, selecting the elements that fitted his own character and temperament.

    Keynes admired Burke's appreciation of the "organic" ruling elite of Great Britain. There were differences over policy, of course, but Keynes joined Burke in hailing the system of aristocratic rule as sound, so long as governing personnel were chosen from the existing organic elite. Writing of Burke, Keynes noted, "the machine itself [the British state] he held to be sound enough if only the ability and integrity of those in charge of it could be assured"

    Indeed Keynes displayed a positive taste for lying in politics. He habitually made up statistics to suit his political proposals, and he would agitate for world monetary inflation with exaggerated hyperbole while maintaining that "words ought to be a little wild — the assault of thoughts upon the unthinking." But, revealingly enough, once he achieved power, Keynes admitted that such hyperbole would have to be dropped: "When the seats of power and authority have been attained, there should be no more poetic license" (Johnson and Johnson 1978: pp. 19–21).

    Maynard Keynes's approach in economics was not unlike his attitude in philosophy and life in general. "I am afraid of 'principle,'" he told a Parliamentary committee in 1930 (Moggridge 1969: p. 90). Principles would only restrict his ability to seize the opportunity of the moment and would hamper his will to power. Hence, he was eager to desert his earlier beliefs and change his mind on a dime, depending on the situation.

    In 1947 Murray Rothbard wrote an essay that could have come straight form today's NYT if they had independent thinkers and not mind-numbed robots assembles on the Stepford lines at Ivy League (institutions) appropriately named, by the way):

    "Fifty years ago, an exuberant American people knew little and cared less about economics. They understood, however, the virtues of economic freedom, and this understanding was shared by the economists, who supplemented common sense with sharper tools of analysis.

    At present, economics seems to be the number one American and world problem. The newspapers are filled with complex discussions of the budget, wages and prices, foreign loans, and production. Present-day economists greatly add to the confusion of the public. The eminent Professor X says that his plan is the only cure for world economic evils; the equally eminent Professor Y claims that this is nonsense – so whirls the merry-go-round...However, one school of thought – the Keynesian – has succeeded in capturing the great majority of economists. Keynesian economics – proudly proclaiming itself as "modern," though with its roots deep in medieval and mercantilist thought – offers itself to the world as the panacea for our economic troubles...With great intellectual arrogance, Keynesians brush aside all opposition as being "reactionary," "old-fashioned," etc...Against this onslaught, many sincere liberal-minded citizens have been swayed by the Keynesians – particularly by their argument that the wide governmental intervention they advocate will "solve the problem of unemployment." ...To launch a successful counterattack against the Keynesian invasion, therefore, requires more than righteous indignation toward the proposals for government action in the Keynesian program. It requires a well-informed citizenry who thoroughly understand the Keynesian theory itself, with its numerous fallacies, unrealistic assumptions, and faulty concepts."

    What are these fallacies, you might ask?
    1. All Keynesians conceive of the State as a great potential reservoir of benefits, ready to be tapped. The prime concern for the Keynesian is to decide on economic policy.
    In medieval and early modern times, the ancestors of the Keynesians who advocated similar policies also proclaimed that the State could do no wrong. At that time, the king and his nobles were the rulers of the State. Now we have the dubious privilege of periodically choosing our rulers from two sets of power-thirsty aspirants

    2. The Keynesian theory (or model) takes the KISS principle to an extreme as it highly oversimplifies the real world by dealing with a few large aggregates, lumping together the activity of all individuals in a nation.
    This failure of the Keynesian model is a direct result of misleading aggregative concepts. Consumption is not just a function of income; it depends, in a complex fashion, on the level of past income, expected future income, the phase of the business cycle, the length of the time period under discussion, on prices of commodities, on capital gains or losses, and on the cash balances of consumers.

    Furthermore, the breakdown of the economic system into a few aggregates assumes that these aggregates are independent of each other, that they are determined independently and can change independently. This overlooks the great amount of interdependence and interaction among the aggregates. Thus, saving is not independent of investment; most of it, particularly business saving, is made in anticipation of future investment. Therefore, a change in the prospects for profitable investment will have a great influence on the savings function, and hence on the consumption function. Similarly, investment is influenced by the level of income, by the expected course of future income, by anticipated consumption, and by the flow of savings. For example, a fall in savings will mean a cut in the funds available for investment, thus restricting investment.

    3. A further illustration of the fallacy of aggregates is the Keynesian assumption that the State can simply add or subtract its expenditures from that of the private economy. This assumes that private investment decisions remain constant, unaffected by government deficits or surpluses. There is no basis whatsoever for this assumption. In addition, progressive income taxation, which is designed to encourage consumption, is assumed to have no effect on private investment.

    In summary, It is important to recall that Keynesianism was born and was able to capture its widespread following under the impetus of the Great Depression of the thirties, a depression unique in its length and severity, and, especially, in the persistence of large-scale unemployment. It was its attempt to furnish an explanation for the events of the thirties that gained Keynesianism its popular following. Using a model with assumptions that restrict its application to a very short period of time, and easily arguable served only to prolong and exacerbate the Depression, and completely fallacious in its dependence on simple aggregates, all Keynesians confidently order government deficits as the cure for whatever ails the economy.

    Are you ready for more of the same over the reamaining twnty-nine or so months of the Obama regime?
     
    As a result I recommend that you pursue a barbell strategy: Continue to but U.S. Treasuries in the short term and be ready to short them at any time the Chinese
    skip an auction. At the same time buy gold and other precious metals. If you don't want to hassle with buying the physical metal then use UGL. You may even want to consider some of Perter Schiff's advice and buy gold that is stored outside the U.S. An easy way to accomplish this task is to buy the ETF SGOL.

    For longer term buy agricultural commodities, as stores of values DAG  or MOO and other ETFs that give exposure to areas essential to life. Those lower down on Maslow's Need Hierarchy and thus less discretionary and harder to substitute by the average Joe and Jann.

    Build short hedges to protect your portfolio value from the inevitable revaluation of "the market" that is coming as the investing public increasingly recognizes the motivation behind Obama and the Fed.

    Use inverse index ETFs such as  BGZ anytime the market rallies for several days. Notice this is not the same as trading a price range per se but trading a time range.

    Professors Ken Rogoff and Carmen Reinhart studied 15 economic crises over the last 75 years. What they found was what you'd expect: real recoveries in the post-Keynes era are rare. Instead, in the 10 years following a crisis, economic growth rates are lower and unemployment is higher than in the years preceding the crisis. In two thirds of the episodes, jobless rates never recovered to pre-crisis levels, ever. And in 9 out of 10 of them, housing prices were still lower 10 years after the crisis ended.

    "Our review of the historical record, therefore, strongly supports the view that large, destabilizing economic events produce big changes in the long-term indicators, well after the upheaval of the crisis. [Up to now," the authors warn, "we have been traversing the tracks of prior crises. But if we continue as others have before, the need to de- leverage will dampen employment and growth for some time to come."]

    This suggests that you ain't seen nothing yet and that I am no Cassandra. Right now I can tell you that safe is always better than sorry when Keynesians stimulate things.

    . Don't get your head handed to you again by the pundits that have been wrong throughout this entire decline. It is not a cycle because the markets cleansing mechanisms have been short-circuited. A cycle suggests a reversal of the decline, I am not sure if the second derivative of the rate of decline has even turned positive which would at least suggest a less bad trajectory.

    IF YOU WANT TO KNOW WHERE WE ARE GOING THEN YOU MUST IDENTIFY WHO IS DOING THE DRIVING...the road map suggests that you be certified to ride in a handbasket for where we are headed


    Disclosure: No positions
    Stocks: SPXS, MOO, UGL
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