Navigating the Financial Markets
with an Austrian Compass
Mises Circle, New York City
May 22, 2010
Kevin Duffy
Bearing Asset Management, LLC
Bullet train to serfdom
August 7, 1989
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“At the rate things are going, we
are all going to end up working
for the Japanese.”
~ Lester Thurow, MIT
economist, 1989

“The United States is rapidly
becoming a colony of Japan.”
~ Congresswoman Helen
Bentley, 1990

“The Cold War is over, and Japan
won.”
~ Sen. Paul Tsongas, 1992
Austrian school warnings unheeded

If anything is new about banking in the 1980s, it is the substitution
of federal guarantees for the liquidity of individual banks. It is the
policy that, even in smaller institutions, depositors will be protected.
It is this regulatory sea change that distinguishes the current debt
expansion from so many earlier ones.
Professor Rothbard’s theory holds that a run-resistant,
semi-socialized, fractional reserve banking system is a
house of cards.

~ James Grant, “Bring Back the Bank Run,” The Free Market,
February 1990
“Entrepreneurial judgment cannot be bought on the
market. The entrepreneurial idea that carries on and
brings profit is precisely that idea which did not
occur to the majority. It is not correct foresight as
such that yields profits, but foresight better than that
of the rest. The prize goes only to the dissenters, who
do not let themselves be misled by the errors
accepted by the multitude.”
Ludwig von Mises, Human Action
Viewing the world through two different
lenses
Boom
Bust
Stimulus
Regulation
Villains
Contagion
Sovereign defaults
Statist/
Interventionist
Austrian/
Non-interventionist
caused by greed and
“animal spirits”
caused by mispricing of
credit by central bankers
caused by lack of aggregate
demand
consequence of boom;
healthy readjustment
prevent failure, spur
demand
do nothing; reduce burden
of public sector
tame animal spirits, punish
“greed”
allow failure
short sellers who profit
from misery of others
anyone who keeps the
deception going
selling panic
buying frenzy
unimaginable catastrophe
pot of gold at the end of
the rainbow
Empirical case for non-intervention

Current economic system is interventionist
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Crises and responses keep increasing in magnitude
Each crisis gets closer to government
Failure of regulation theory

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Intervention institutionalized in 1913 – Federal Reserve
Less regulated hedge funds – why weren’t they at the center of the crisis?
Heavily regulated banks – at the center of the crisis
Regulatory failure - rating agencies (1973-1975)
Interventionists continually get it wrong
Interventionists resort to falsehoods
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Corruption of language
Corruption of history
Corruption of language

“This was about the invisible hand having a party, a non-regulated
drinking party, with rating agencies handing out the fake IDs!”
~ Paul McCulley, PIMCO, on the financial meltdown

“This laissez faire really has killed us.”
~ Jim Cramer, interviewing Rep. Barney Frank, January 21, 2010

“No one likes to put the taxpayer into situations like this… Government
intervention is not something I came down here wanting to espouse, but
it sure is better than the alternative.”
~ Henry Paulson, Treasury Secretary, on the government takeover of Fannie
Mae and Freddie Mac, September 8, 2008

“I'm not looking for extraordinary power.”
~ Henry Paulson, Treasury Secretary, on TARP, September 24, 2008
Corruption of history

“Depression scholars – including Bernanke – tend to see the
Hoover administration’s approach of balancing budgets and
tightening belts during the downturn as a tragic mistake. They
embrace the Keynesian view that aggressive government action backed
by government money is needed to reverse death spirals by restoring
confidence and reviving demand.”
~ Time 2009 Person of the Year, December 28, 2009

“Those who contended that during the period of my
administration our economic system was one of laissez faire
have little knowledge of the extent of government regulation.
The economic philosophy of laissez faire, or "dog eat dog," had died in
the United States forty years before, when Congress passed the
Interstate Commerce Commission and the Sherman Anti-Trust Acts.”
~ Herbert Hoover
Corruption of history
“Nobody saw this coming.”
~ Angelo Mozilo, CEO, Countrywide Financial, July 24, 2007
Interventionists get it wrong

“This correction will run its course until the middle of the year.Then things will
turn up again, because not even Greenspan can stop the Internet
economy.”
~ Larry Kudlow, The New York Post, February 25, 2000

“The Federal Reserve will announce a monetary policy decision Tuesday afternoon
amidst great turmoil in the world economy. Let's hope they make the right move
and open the money spigots.”
~ Larry Kudlow, National Review Online, September 24, 2002

“I wouldn't panic. Investors should stay in for the long-term. Goldilocks is alive
and well.”
~ Larry Kudlow, CNBC, December 11, 2007
“Time and again, when confronted with negative
financial "surprises" by corporate issuers during the
last decade, the "independent" ratings agencies fell
down on the job. This kept slow-on-the-uptake
investors dancing on the decks of numerous financial
Titanics, while those heeding other signals (such as
the burgeoning market for credit-default derivatives)
prepared to man the lifeboats.”
James Chanos, “Short-Lived Lessons From an Enron Short"
The Wall Street Journal, May 30, 2006
Short sellers: Shoot the messenger

“It's very natural for us all to overreact in times of stress, but I'm not a fan of
unmitigated shorting. We have nearly $2 trillion in hedge funds that simply
don't have any reporting responsibilities.”
~ Charles Schwab, BusinessWeek, July 16, 2008
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“I’m for markets. But when it felt like it had gotten abusive, when it was
free money to short-sellers who were piling on, it felt less like the
market and more like it was being manipulated. I crossed over.”
~ Lloyd Blankfein, CEO, Goldman Sachs, January 2010
Regulation: The lessons of Enron

“Conviction on all 49 counts makes this unlikely in the future. This
is good: it restores confidence… We were in the biggest
bubble in history... I don't think that's going to happen for
a long time… There were lessons I think that were learned.”
~ Jeremy Siegel, as appeared on CNBC, May 26, 2006

“Now we have a greater appreciation of the role of watchdogs.
Sarbanes-Oxley was a good idea, is a good idea. Leave it alone.
We need it to prevent the Enrons of the future.”
~ Anthony M. Sabino, law professor, St. John's University,
Washington Post, May 26, 2006
The trouble
with stimulus
“Most remarkably, the
craziness isn’t likely to stop
anytime soon. The low cost
of capital is probably going to
last ‘five to seven years,’ says
Sam Zell.”
“Why money may stay cheap longer
than you think”
February 19, 2007
“James W. Paulsen… sees an
even longer horizon: ‘This
could be a prolonged cycle
where the cost of capital is
low [for] 10 or 20 years.’”
Recrimination
cycle top?
“As Washington gets
down to the hard work
of putting laws into place
that are designed to
prevent another crisis,
they are shaping the way
government will protect
investors and consumers
for the next generation.”
“The women charged with cleaning up
the mess”
May 24, 2010
Stimulus déjà
vu
“The tale of the economy's
remarkable turnaround is
largely the story of swift
reaction, a willingness to
write off bad debts and
restructure, and an embrace
of efficiency—disciplines
largely invented in the U.S.
and at which it still excels.
America still leads the
world at processing failure,
at latching on to new
innovations and building
them to scale quickly and
profitably.”
“The remarkable tale of our economic
turnaround”
April 19, 2010
Stimulus déjà
vu
“When you take it all
together, the response was
massive, unprecedented, and
ultimately successful,” says
Mark Zandi, chief
economist at Moody’s
Economy.com.
“The Case For More
Stimulus” – p. 33
“Obamanomics is working better than
you think. Who says? Wall Street”
April 19, 2010
“One trillion dollars is a big number.
This is enough to buy all of Greece's
debt twice, with enough left over to
buy all of Portugal's debt. It was
meant to remove any potential for
contagion. Problem solved.”
~Alan Skrainka, Chief Market Strategist, Edward Jones,
Barron's, May 15, 2010
“We’re bullish until the bill comes
due.”
Jason Trennart, as appeared on CNBC,
December 9, 2009
Fool me once…