Those of an Austrian economic mindset find the construction of today’s financial system unfit for purpose, flawed and guaranteed to eventual failure.
You know, all that fiat money stuff, bubble economics, 30 times leveraged investment banks, global debt proliferation, proto-Keynesian print-print-and-hope economic management et cetera. If you’re thinking this way, you’ll likely see the thing as the biggest experiment in money ever conducted, a giant Ponzi scheme and maybe the largest rent-seeking apparatus you’ve ever understood.
Whilst systems based on confidence – and bubbles for that matter – take a long time to build, with lots of reflexive reinforcement needed along the way (if you’re a fellow Soros fan), they can disappear in the blink of an eye. You might think of a growing balloon in search for its eventual meeting with a sharp and problematic pin.
As a result lots of goldbugs, perma-bears, considered structural bears, monetary thinkers and Bogpaper oddballs seek to position themselves and their capital accordingly, in mind of the some-day arrival of the pin.
However, this allocation of our time, energy and capital isn’t an easy one to get right.
The long lives of sup-optimal and flawed systems
Even when nations, bubbles and bond markets are built upon nothing it can take decades for the final reckoning to arrive and everything to unravel.
Tim Price of MoneyWeek was reminding us the other day of the Soviet Union.
The USSR lasted many, many decades longer than it should have done. It was riddled with bad economics, rent-seeking and contradictions, but it outlasted the predictions of many smart thinkers by 80 years.
Being early in investment can be as bad as being wrong.
Mike Burry, John Paulson and a few other visionary or lucky investors had to wait years for their credit default swaps to pay out on the eventual busting of the sub-prime bubble. Even though their positions where highly asymmetric and efficient to finance, their investors felt the pain, called for explanations and often nearly withdrew their capital from these fund managers as a result. You might also argue these money runners also depended upon their investment bank counterparties and their prime-brokerage departments honouring their contracts too!
Being a big short on today’s Bretton Woods II financial system is an aggressive stance and one that has risk. A few doyens of the gold markets are calling for a balloon pop between 2014-2015, but accurate prediction of things is highly difficult.
What the hell to do?
Chuck Prince, ex-CEO of Citi, said that ‘whilst the music is playing, we’ll keeping dancing’, and his meaning here has relevance for us all.
Whilst the system lasts, being wholly short, only allocated to gold, guns and whisky or whatever, means you miss out from new housing bubbles and other rising tides.
Smart fund managers like Kyle Bass and the aforementioned Soros do have some gold and a range of other carefully thought out hedges, but whilst the music is still playing they also have lots of other equities, bonds and other more Bernanke-loved investments.
It is possible to play both games at once, to keep riding the Western obsessions of property and financially-engineered stock broker favourites, whilst also having your financial crisis insurance at the ready.
It’s about surviving and making money
Whilst the system might be wrong, ill-conceived, selfish and inequitable, it is what it is and might last much long than we think too.
The UK has just reported pretty impressive new growth in its property market, with rising house prices, much improved bank-lending and warming levels of re-financing. As a structural bear I wonder if the BoE and its partner central banks are succeeding in re-inflating a new property bubble to keep our finance, insurance and real estate (FIRE) dependent economies ticking along.
Bernake et al have declared war on savers, gone on all in on flawed economic notions and are going to do whatever they can to keep their plan for things alive.
I firmly believe that in the long run Austrian ideas will win out and that Greenspan, Bernanke, Krugman, Eichengren et al will be fully exposed as utterly wrong-headed. But how long do we have to wait?
Being too short brings risk, volatility and difficult periods – like the last 18 months for gold and silver prices.
What’s your hedge then pal?
I spend my life aggressively allocating my energy, time and capital to benefit from a future great wealth redistribution, monetary reset or crack up boom, but this isn’t the right thing for many others. The young, free and normally solvent can swing for balls others might want to leave alone.
This all makes me think of the most sensible investment allocation ever recommended (IMHO) – where Swiss bankers for centuries urged their wealthy clients to lay the solid foundations of their wealth with 10 per cent in gold. I have since read interesting studies where academics and traders have suggested that just £10,000 in gold can act as an effective hedge for up to £250,000 other, more traditional assets.
Having 10 per cent in gold is like being partially short, but mostly long today’s system. A greater allocation to such hedges is more aggressive, whilst a lower one is the opposite.
We don’t know this system will end. We can see the players in this most fast-paced of global currency wars building their hands. Fellow Austrians might mostly see a final reckoning, but knowing when and positioning yourself accordingly continues to be a most tricky task.
How do you stack your chips?