Read Only If You Mean It When You Say "I like someone who tells it like it is"

My stepson Jonathan is a free thinking, free market advocate --- funny how all of our children seem to be of that ilk (I'm sure they were just born that way) --- who loves to place his stepdad in the oft-uncomfortable position of seemingly having to defend the principles he's come to adopt (not that he's not an adept debater himself, it's just that one tends to lack credibility with one's friends/peers. It seems that with grizzle comes credibility). 

Over dinner the other evening he informed me that he's inviting a childhood friend to our house for a "game night". It's not that the young man is some gifted artist who would be the ace brought in to guarantee victory for the all-male pictionary team (Jonathan's not above such deck-stacking by the way) --- oh no! --- it's that he wants to rope his friend and yours truly into a debate on the merits of freedom versus collectivism. Apparently the articulate young philosophy major has become a proud communist. If it comes together I'll let you know it went...

In the meantime, I followed up with Jonathan via text encouraging him (again) to read Don Boudreaux's blog Cafe Hayek. I told him he'd gather huge material for future discussions, and I suggested that he direct his buddy there and ask him to address the points Don makes. Which brings me to why I'm penning this message this morning.

I often say in these politically charged times that the world needs another Milton Friedman, or another Frederick Hayek! Dr. Friedman in particular was a gifted communicator of free market principles. I don't know the number of his interviews I've read and watched (search "Milton Friedman" on YouTube) over the years (dozens and dozens for sure), but I can't recall a single time when I wasn't convinced that he had at a minimum got a number of readers, viewers and/or audience members rethinking their views on enterprise, politics and freedom. The many works of Hayek are timeless, and critically important, classics that I'm sure will live on for generations to come.

Well, we actually do have a living source of the sort, and I'm going to suggest that you, dear reader --- particularly if you at all buy into what you're hearing on the stump these days --- go to cafehayek.com and after reading today's posts subscribe via email in the upper left corner. Don Beaudreaux, an econ professor at George Mason University, is in my view one of the world's few credible authorities on the economics of politics and freedom. 

Over the years my senses have become keenly honed to the political biases that infect so much of what the public is fed with regard to government and the marketplace. For example, very recently I heard an economic consultant to a current presidential candidate cite the Economic Policy Institute's claim that the North American Free Trade Agreement has cost the U.S. 700,000 jobs --- a claim I know to be patently false. Without looking I knew that the Economic Policy Institute would be the tool of some special interest group. Of course I took a quick look and found that the eh em "nonprofit, nonpartisan think tank"'s board is riddled with characters from the sources of a great deal of its funding, which would be labor unions. Yep, the Chairman of the Board is none other than Richard Trumka himself, the president of the AFL-CIO. The International Association of Machinists Union and Aerospace Workers, the Communications Workers of America, the United Steel Workers Union, the Service Employees International Union, the American Federation of State, County and Municipal Employees AFL-CIO, the United Auto Workers Union, the United Food and Commercial Workers International Union, and --- believe it or not --- yet more labor union presidents have found their way to board seats at the "nonpartisan" Economic Policy Institute. Suffice it to say that labor unions are notoriously no fans of free trade, or, let's say, of allowing you and me access to affordable goods from other nations or U.S. businesses access to other labor markets. 

Back to Boudreaux: Spend some time on Cafe Hayek and you'll find that Don is the definition of nonpartisan. While you may not agree with him on every count, you can rest assured that what you'll be taking in is not designed to take you to either side of the political aisle. His blog posts, essays, articles, videos and books have profoundly, and invaluably, influenced my thinking on politics, economics and liberty over the years.

Here's a snippet from a Cafehayek post this morning:

Arguments for protection today – be these trumpeted by Trump, shouted by Sanders, cackled by Clinton, or read in any eminent newspaper or on prominent blogs – are no different or stronger or more refined than were arguments for protection 80 years ago, which themselves were no different or stronger or more refined than were arguments for protection 80 or 160 years before that.  Economists have shown again and again the illogic, the faulty premises, and the biased use of facts that are always to be found in popular arguments for protection.  Yet these arguments never die.  They are idea-zombies, largely because a failure to grasp fundamental economics makes mercantilism seem correct – in the same way that a primitive human being, never exposed to even the most rudimentary scientific thought and judging exclusively from his own personal experience – concludes that the earth is stationary and at the center of moving orbs and twinkly little lights.  This popular ignorance is greedily exploited by powerful producer groups to secure state privileges for themselves at at the expense of the economically uninformed masses.

There is nothing remotely progressive about protectionism.  It is regressive politically, ethically, and economically.  Buffoonish ignoramuses such as Donald Trump and knavish power-mongers such as Hillary Clinton surely don’t care about this reality, but, for heaven’s sake, people who aspire to be intelligent, rational, cosmopolitan, and unbiased ought not fall for the mix of idiocy and grasping-greed that is protectionism.

Okay, "nonpartisan" is probably an understatement! Please don't let your affinity for either candidate allow Don's characterizing to turn you off. Like I said, you may not appreciate every point, but if you mean what you say when you say "I like someone who tells it like it is", rejecting my plea to subscribe to Cafe Hayek (totally unsolicited btw) suggests what you really mean is "I like someone who tells it like it is, as long as it jibes with my biases". Which, I assure you, is what politicians and special interest groups are counting on!

Long-time readers know that I share Don's frustration with protectionism. The fact that it is forever such an effective weapon in the arsenal of political campaigns suggests that the everyday American has no idea how the world must come together to supply him/her with even what he/she surely views as today's bare necessities. Here's Matt Ridley, in his phenomenal book The Rational Optimist, describing what it takes to get him to 9 o'clock in the morning:

As I write this, it is nine o’clock in the morning. In the two hours since I got out of bed I have showered in water heated by North Sea gas, shaved using an American razor running on electricity made from British coal, eaten a slice of bread made from French wheat, spread with New Zealand butter and Spanish marmalade, then brewed a cup of tea using leaves grown in Sri Lanka, dressed myself in clothes of Indian cotton and Australian wool, with shoes of Chinese leather and Malaysian rubber, and read a newspaper made from Finnish wood pulp and Chinese ink. I am now sitting at a desk typing on a Thai plastic keyboard (which perhaps began life in an Arab oil well) in order to move electrons through a Korean silicon chip and some wires of Chilean copper to display text on a computer designed and manufactured by an American firm. I have consumed goods and services from dozens of countries already this morning. Actually, I am guessing at the nationalities of some of these items, because it is almost impossible to define some of them as coming from any country, so diverse are their sources.

More to the point, I have also consumed minuscule fractions of the productive labour of many dozens of people. Somebody had to drill the gas well, install the plumbing, design the razor, grow the cotton, write the software. They were all, though they did not know it, working for me. In exchange for some fraction of my spending, each supplied me with some fraction of their work.

Weekly Message: Uncertainty and Illusions

Every now and again someone will ask me what I think about so and so market guru’s prediction that stocks are either going to the moon or sliding into the gutter. As I’ve reported the past couple of weeks, some legit personalities have been in the market-sliding-into-the-gutter camp. The beauty of the equity market lies in its unpredictability: It is the quintessential humbler of mortals whose egos convince them that their past investment successes indicate that they’ve some unique and/or uncanny predictive prowess.

Alex Krainer, in Mastering Uncertainty in Commodities Trading: Generating sustainable profits in forex, commodities and financial markets through trend following, tells the story of two Wall Street wizards who once lost their way:

…in early 1995, Jeffrey Vinik, the manager of Fidelity Magellan, then the world’s largest mutual fund, got trampled by the markets as the internet technology boom was about to take off. At the time, Vinik held over 40% of the fund’s assets in technology stocks, proclaiming that most of his investors "have invested in the fund for goals that are years away… I think their objectives are the same as mine, and that they believe, as I do, that a long-term approach is best." But only six months after he wrote this, Vinik dumped almost all of his technology shares, selling close to $ 19 billion worth in two frantic months. In retrospect, it’s clear that Vinik was right on the money with his large allocation to technology companies, but fearing that the already “overvalued” tech stocks were due for a large correction, he deprived his investors of the windfall from one of the most spectacular bull markets ever. At the other end of that same bull market, another star manager made a similar and equally unfortunate mistake. While working for George Soros in 1999, Stanley Druckenmiller accumulated a significant short position in internet stocks he believed to be stupidly overvalued. He was right, of course, but the Nasdaq's meteoric rise eventually made him blink, cover his shorts and join the bulls on the long side. Shortly thereafter, the dot-com bubble burst and 75% of the internet stocks Druckenmiller shorted eventually went to zero. The rest of them fell between 90% and 99%. Instead of making an absolute killing in 2000, Stanley Druckenmiller ended up with the biggest loss in his career.

Tim Richards, in Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias, issues a timeless warning:

All too often, spurious patterns and superstitious thinking accidentally produce the right results and then get dressed up as good investment advice. Smart investors need to hone their critical faculties to detect these fake tools, in just the same way they need to be wary of people who claim to have a perfect investing strategy.  

And helps us understand how the stress of market uncertainty --- and the human need to control --- can trigger illusory thinking that acted upon would in all likelihood do great harm to our bottom lines:

Uncertain conditions are those that are most likely to cause us to generate the random connections between events that, to all intents and purposes, look like superstitions. The key to these superstitions is that they allow us to try and exert control over the uncontrollable: they turn the unknown unknowns we can't control into knowns that we can. As investors, this means we start thinking we can predict the future, when the truth is we haven't got a clue. What do you think happens when an investor starts making investment decisions on the basis of illusory patterns? Yep, they tend to lose a ton of money.

So, please, never ever, evereverever, get fooled into believing that the blokes who I featured in my August 4^th and August 9^th videos (below) can know what they would have us believe they know.

Now, those featured guessers just happen to be among the ones who have the market heading to the gutter. We must also apply the very same skepticism to those mavens who have it heading to the moon.

Have a great weekend!

Marty

Market Commentary: What's the market saying about the economy? (video)

This Week's TV Segment (video)

Quote of the Day

French social psychologist, sociologist, anthropologist, inventor and amateur physicist (dang!) Gustove Le Bon made sense in his 1895 book The Crowd: A Study of the Popular Mind --- whether we’re talking crowd mentality related to markets or, well, hmm:

The first is that the individual forming part of a crowd acquires, solely from numerical considerations, a sentiment of invincible power which allows him to yield to instincts which, had he been alone, he would perforce have kept under restraint. He will be the less disposed to check himself from the consideration that, a crowd being anonymous, and in consequence irresponsible, the sentiment of responsibility which always controls individuals disappears entirely. 

The second cause, which is contagion, also intervenes to determine the manifestation in crowds of their special characteristics, and at the same time the trend they are to take. Contagion is a phenomenon of which it is easy to establish the presence, but that it is not easy to explain. It must be classed among those phenomena of a hypnotic order, which we shall shortly study. In a crowd every sentiment and act is contagious, and contagious to such a degree that an individual readily sacrifices his personal interest to the collective interest. This is an aptitude very contrary to his nature, and of which a man is scarcely capable, except when he makes part of a crowd.

Market Commentary: Bubbles?? (video)

Quote of the day...

Long-time clients and readers know that I believe humility sits atop the list of traits of successful investors and, especially, investment advisers. Per Tim Richards in Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias (Wiley Finance):

... a study of professional traders exposed to fairly normal looking, but actually completely random, conditions concluded that many of the participants demonstrated illusion of control problems. Notably, the individuals who were most inclined to illusions of control were also most likely to perform the worst: they were more likely to see their successes as evidence of their skill, and to take more risks because of this— they simply failed to recognize the limits of their own abilities. In essence, the more deluded the individual trader was about their own ability to influence outcomes, the poorer their investing results were. Thinking we're in control when we're not is always a dangerous illusion. For investors it's a guaranteed way of losing money and the safest position to adopt is that in the short-term markets are always unpredictable. Many people find that almost impossible to accept: they shouldn't be allowed anywhere near stock markets.

(emphasis mine)