Thursday, October 24, 2013

My Amazon Review of Mark Spitznagel's, "The Dao of Capital: Austrian Investing in a Distorted World"

Money manager Mark Spitznagel has written a very wordy paean to Austrian Economics. If ever a book needed a tight fisted editor this one is it. However, once you get beyond reading every thing Spitznagel knows about Austrian Economics the reader will get a better understanding of economics and the investment process. The key takeaways from the book are the core notions of Austrian Economics which value roundabout(indirect) production over direct production and the role of monetary policy to distort investment decisions. For example, in the case of the former, the direct route to catching a fish would be to try to grab one in a pond while the roundabout and far more profitable route would be to make a net first and then use it to catch fish. In case of the latter, the low interest policy of the Federal Reserve induces investment that will be proved unprofitable once interest rates normalize leading to a bust. This knowledge leads investors to hedge tail risks when the stock market trades at high price/replacement cost ratios and to buy individual stocks that with high returns on capital that won't be affected by increases in interest rates. Nothing really new here, but puts some real foundation underneath it. That is the value of the book.

Spitznagel uses the biographies of the three great Austrian economists, Carl Menger Eugen von Bohm-Bawerk and Ludvig von Mises to explain Austrian economic theory. All of that is to the good, but he leaves out perhaps the greatest Austrian economists of all time, Joseph Schumpeter and Friedrich von Hayek. I guess Schumpeter's and Hayek's work don't quite fit into his theories. He also ignores the work of three American economists who built on the work of the Austrians: Irving Fisher, Frank Knight and Jack Hirshleifer, a former professor of mine. For example Hirshleifer, in his "Investment, Interest and Capital" outlines a general equilibrium approach to interest rate determination with a society's rate of time preference and an intertemporal production possibilities function, pure Austrian economics.

The full Amazon URL is:

Wednesday, October 23, 2013

Monday, October 21, 2013

After Action Report on the Government Shut Down

The wrecker caucus within the Republican Party failed in their attempt to perform a late-term abortion on Obama Care. After 16 days of folly the wreckers succeeded in damaging the Republican brand name and escalated the civil war inside the Republican Party that will certainly rage until at least the 2016 convention. It won't be pretty.

Strange as it may seem the wreckers were rescued by Senate Minority Leader Mitch McConnell who enshrined the 2011 sequester in the upcoming budget negotiations. The congressional negotiators will be fighting it out on Republican terrain which makes it likely the Republicans will eke out a small victory with respect to spending and taxes. Furthermore government as a whole has taken a big hit, and for better or worse, it will be harder to rally the country for the domestic and international tasks ahead.

Meantime the Obama Care roll out has been disaster. The entry website is not working; it is not a technical glitch, but rather a fundamental software failure. Simply put the back end of the software may not be working which means inaccurate information is being sent to the health insurance companies. This is more than a software failure, it is a fundamental management failure on the part of the Obama Administration. Let's face it President Obama is not a manager and it looks very obvious there was very little hands on control over the past three years on the implementation of his signature program. At the very least HHS Secretary Kathleen Sebelius should be fired.

Over the longer run, despite the explosive rally in the stock market, the U.S. will pay a big price in the global financial markets for threatening to default on our debt. It means the dollar's status as a reserve currency has been devalued. It means higher interest rates, a weaker dollar and a loss of geopolitical credibility. For the wreckers to even threaten default  was criminal negligence.

Taking a step back our country has been through this before. 75 years ago this Veterans Day Kate Smith introduced Irving Berlin's "God Bless America" to a national radio audience. True the country was divided about the coming European War, but she offered hope. We still live in a great country and I think you will enjoy the following clip,