Review – The Age of Cryptocurrency

The Age of Cryptocurrency

I should’ve known better than to buy a book touting “the age of” something that came into existence only a few years ago and is currently playing out. Living history? Only if it leaves a meaningful legacy behind. But after reading this breathless book about bitcoins and blockchains, I have my doubts.

According to the authors, the primary usefulness of the blockchain, what makes it revolutionary, is that it will allow for low cost financial transactions. Not improved privacy, accuracy or honesty in exchanges. Not an end to the menace known as government. A few basis points in savings on transactions requiring a financial intermediary.

And even then, that is doubtful. The blockchain does nothing of and by itself. Despite being the heralded horseman of the middleman apocalypse, it requires a bunch of middleman applications and services (still being developed!!) to be practically useful to anyone, and of course no one is building and operating those mechanisms for free. Hello, economic scarcity, nice to see you again!

That’s kind of the theme of this entire, horrible book. “Wouldn’t it be so cool if…” and “Things are going to be totally different when…” but we’re not there yet, and we might never be.

This book was prematurely written, poorly researched (hyperventilated hype and name-dropping is not journalism, it’s puff piece paid marketing) and offers little to anyone seeking to understand how the blockchain operates in layman’s terms, nor does it put the extremely short lifespan of this technology into a meaningful chronological context so one can follow where it came from and where it might be going.

Challenging the global economic order? Considering the amount of fraud the community has already witnessed as disclosed in the book, it appears to be more part and parcel and less revolution in the streets.

The blockchain may offer some interesting applications in due time that don’t involve stupid self-owning companies pursuing their robotic amoral self-interest, but in the meantime I’m bearish to indifferent about it all and will continue to keep a bemused distance from the phenomenon, including schtick introductions like this work.

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Review – Panic: The Betrayal Of Capitalism By Wall Street And Washington

Sadly, Panic: The Betrayal Of Capitalism By Wall Street And Washington does not appear to be in print any longer. Luckily, I found a good used copy on Amazon and will cherish its now-secret message all the more.

As I read through this book several months ago, instead of summarizing my thoughts I just want to record a few key ideas and quotes for later reference.

“The Anti-Entrepreneurs”

In any modern state the government will always be the banks’ biggest client and therefore will always make most of the rules, even if it pretends not to.

The ideologues of modern finance offered to make any fool rich if only he renounced the first obligation of the capitalist, the burden of judgment.

This process of confronting uncertainty and successfully resolving it usually by dint of hard work, diligent analysis, and sound judgment is the only source of what many economists have called “entrepreneurial profit” or sometimes “true profit”.

Underpinning the ideology of modern finance is the notion that the insight, judgment and even diligence of the entrepreneur are irrelevant for investing in public securities markets. These markets, we are told, are special, too powerful and too perfect to allow any entrepreneur’s judgment to matter.

If the ideology of modern finance had a motto, it might be “thinking doesn’t work.”

Capitalism demands free markets because it needs free minds.

The bureaucrat of capital dreams of a world in which failure is impossible.

Crony capitalists on the right and socialists on the left united as always behind their most fundamental belief, that wealth is to be captured by power and pull rather than created in the minds of men.

“New Risks in Old Bottles”

The great mission of modern investment theory is to replace all idiosyncratic risk with systemic risk.

The primary skill for finance, under this theory, becomes diversification, which becomes an advanced statistical methodology for making sure a relatively small number of securities accurately represents a much larger class of securities.

If I know nothing, my need for diversification is infinite.

All investment is reduced to insurance.

Ignorance is the father of panic.

“The Misinformation Economy”

One way to think about panic is as a general, nonspecific response to a poorly understood particular and specific problem.

“To build a perfect model of the universe would require all the matter and energy in the universe, because the only perfect model, the only model that shed no information and made no compromises in order to achieve its object, would be the universe itself.”

The mortgage meltdown can be understood as an instance of model failure.

information is differentiation; information is what comes as a surprise against the background of knowledge already possessed.

If uncertainty and risk are nearly synonyms. then information and risk are nearly opposites.

It is not particularly unusual for all thirty stocks in the Dow to go up and down at the same time; that rarely happened when market participants were interested in the value of individual companies.

“The Reign of Risk”

Modern portfolio theory was a late bloom of the great eighteenth and nineteenth century impulse to explain human society by mechanical or “scientific” principles as regular as those of classical physics.

If economics were about entrepreneurship, it would not look like physics. It would look a little like philosophy. Mostly it would look like literature. [The Lion’s note: if you ascribe to the Austrian school, it does!]

To treat investment as a quantitative exercise relying on the efficiency of markets and advanced mathematics to eliminate the hazards of human judgment. [the ambition of investors under Modern Portfolio Theory]

MPT created a field for which PhDs could be granted and journal articles published. Before MPT, investment theory had been mere reflection upon experience, a wisdom literature dominated by amateurs like Benjamin Graham.

[MPT…] can be deeply attractive to those trying to support capitalist lifestyles with only bureaucratic talents.

The most important question any investor can ask: For what are investors paid? MPT’s answer: For accepting risk.

risk is not the foundation of profit but its most dreaded enemy.

The modern theory conceptually severed financial markets from the rest of the economy. [My note, ” Macro is to Micro as Financial is to Real”]

“The Romance of Risk”

Men and societies become richer precisely as they employ insight, skill and experience, effort and discipline to reduce risk.

Investors are paid for being right, not for the possibility of being wrong.

In life, men who make one good judgment tend to make more good judgments; men who make one bad judgment tend to make more bad ones.

the most important but the most difficult-to-identify ability in business management (or investment) is the ability to judge other men’s ability to judge. [meta-judgment]

“Zoom, Zoom, Zoom”

What modern capital markets do very well is raise large amounts of capital from a broad base of investors who are persuaded to give their money to perfect strangers with precious little idea of what those fortunate recipients are going to do with it. [And, I’d add, little control or legal right to have any say in such decisions; “crowd-sourcing”]

different markets make different trade-offs between liquidity and price discovery one one hand and confidence about value on the other.

Public equity investors demand liquidity in large part because they are unsure about value.

Humor is surprise

It is reasonable to call markets better or worse depending on how much surprise they can absorb before convulsing in dramatic disequilibrium

Lacking a more substantial basis on which to make decisions, financial markets set prices to an astonishing extent by watching– prices!

The most dramatic resolution of this conflict is to eliminate most of the shareholders altogether by taking public companies private

public companies have no owners

Companies, like most assets, do better with strong owners than weak owners.

“Strategic Ambiguity”

When New Dealers tried to set up a banking system immune to panic, their top priority was to remove Mom-and-Pop from their role as bank police.

“Insolvent Immunity”

Here is the quickest way to determine whether you are operating in an honest capitalist system or a corrupt imitation thereof: check the bankruptcy rates.

“Black September”

“Things are somewhat amiss when a country’s finance minister plays bond salesman for a supposedly privately owned company.”

By this time the government had: (a) intimated that deficits in the financial sector were so large and widespread that “anyone could be next” (b) terrified private investors from making investments that might preserve the solvency of deteriorating institutions (c) assumed unprecedented responsibility for investment banks outside the Federal Reserve system and then abandoned that responsibility and (d) made clear that its policy would change on an ad hoc basis. [on the US federal government’s initial response to the financial panic of 2008]

To assume that the buying and selling of shares amounts to managing the firm is the most extreme form of efficient market worship.

“Capitalism Without Capitalists”

The term for someone who rests his economic fate on unknowable future events is not “owner” or even “investor,” but “speculator.”

the government, the biggest player and the weakest owner of all. [criticizing the present ownership of major banks]

Another great review of this book was posted by “CP” at CreditBubbleStocks.com.

And after reading this book, I was inspired to purchase Frank Knight’s Risk, Uncertainty and Profit for my library for further study.

 

Personal Dilemmas Of The Immoral Economy

The WSJ.com has just posted an article, “Buy, Sell, Fret: Retail Traders Swing Into Action“, that is ripe for commentary from the twin perspectives of value investing and Austrian economics. With any luck, we may even venture into the philosophic territory by the end of this episode. Let’s get started:

In a throwback to the day-trading era, the market’s stomach-churning gyrations are creating a new class of stock obsessives hanging on every dip and rebound.

Average investors are scrambling to stay ahead of the massive swings—often via mobile devices like iPads and smart-phones, leading to sharp spikes in trading volumes at many brokerages.

“I am distracted and frankly unnerved,” says Andy Lavin, a public-relations executive in Port Washington, N.Y., who manages about $800,000 of his own money.

Mr. Lavin says he has been checking his iPad regularly during meetings and on his way to work. On Monday, he bought $15,000 in futures on the Chicago Board Options Exchange Volatility Index. After President Barack Obama addressed the decision by Standard & Poor’s to downgrade long-term U.S. debt, Mr. Lavin dashed to monitor the market reaction.

“If you look away for a second, you lose,” Mr. Lavin says.

One of the themes I’d like to explore here is perception versus reality. For example, Mr. Lavin’s perception is that it is his inability to keep up with the markets, tick by tick, that expose him to potential ruination. The reality is that it is his decision to split his attention and capabilities between his professional job and daytrading which exposes him to ruination.

As a value investor, daytrading is obviously an intellectually bankrupt strategy detached from an understanding of fundamental reality because the economic value of companies do not change as often, rapidly or dramatically as their security prices might. So, anyone who becomes obsessive about the frequent changing of security prices without any regard to the underlying economic value of the company the securities belong to is engaging in a speculative gamble, not trying to keep up with an investment portfolio. Daytrading while at work is as absurd as playing online poker at work, or visiting a virtual blackjack table on your iPad while sitting in a meeting. The illusion (delusion?) of control is precisely the same, as is the inappropriateness of the simultaneity.

As an Austrian economist, this appears to be an outstanding example of some of the many unintended consequences of Federal Reserve monetary policies as well as federal government interventionist policies.

In terms of monetary policy, Ben Bernanke’s reckless inflationary mandate creates new malinvestment in the economy by distorting entrepreneurs’ and other economic actors’ view of the true supply of savings in the economy. Interest rates are driven down below their free market equilibrium levels providing the illusion of wealth that doesn’t actually exist. Entrepreneurs (and daytraders are entrepreneurs, though they’re a variety more ephemeral than a butterfly) usually end up in grossly speculative activities because with the new supply of money in their hands and the lowered cost of borrowing at their backs it pays to do so, or so they think.

Similarly we can see the broad effects of an interventionist, regulatory political framework. Such a superstructure creates so many obstacles and added costs for “normal” economic activity that the productively-eager are pushed into enterprises with the lowest cost of entry and the least number of hoops to jump through before one can nominally start making money. Does it get any easier than opening up an electronic brokerage account and ACHing a large deposit?

At the nexus of these two philosophies, economics and investing, we see another tragedy unfolding– where is the comparative advantage (economist) or the analytical edge (investor) in a public relations professional-turned-daytrader? Why has this man, who appears to be quite successful at his chosen career given the size of his gambling stake — I mean, accumulated personal savings — which amounts to $800,000, investing this money on his own in the financial markets?

Why isn’t he putting that $800,000 of capital to work in his own business, where he seems to be demonstrating an ability to earn outsize returns on capital? Assuming this individual is reasonable and not merely gambling, what might this say about the condition of the economy as a whole that he has not chosen this seemingly obvious alternative?

Continuing:

The high-stakes drama is also making once-calm investors jittery. Richard Chaifetz, chief executive of Chicago-based ComPsych Corp., which provides mental-health counseling for 13,000 companies, says his firm has seen a 15% increase in calls from stressed out employees who are watching the stock markets from their desks.

This is another unintended consequence of inflationary monetary policies and, as a certain French economist of the 19th century might say, “that which is unseen”.

The Federal Reserve and its army of statisticians can only (attempt to) calculate that which is priced in units of money. But that which is not priced in money (until it ends up as a psychotherapist or pharmaceutical bill, anyway) can not be calculated.

What kind of effect on national productivity must this be having with so many people so distracted and made anxious by volatility in the financial markets?

Even some 401(k) investors are getting more active. Before this week, Ryan Jones rarely monitored his investment accounts. Now the 30-year old advertising strategist checks his phone several times a day for market reports and devotes his lunch time to rejiggering his portfolio.

“I’m just a regular guy who started the month with a 401(K) balance, and am trying to make sure it’s still there next month,” he says.

I look at quotes like the one above as proof positive that the 401(K) is not as good a tax-reduced deal as it is marketed as, and especially not for all the “regular guys” trying to manage them on their own with limited allocation options, to boot.

There’s just no way for these people to manage their money intelligently in a 401(K). And yet again, it transforms every saver into a part-time stock analyst and investor. This is not where the average person’s comparative advantage is located. Seeing how widespread the 401(K)-miracle wealth thesis is, I’d even call it something of a mania. Rather than taking their savings and investing in something local, tangible and familiar, many people have learned to wish upon a stock market star, cast their savings into a 401(K) like a penny into a fountain and then attempt to patiently wait the duration of their professional career until they can all cash out easy millionaires and retire to Florida or wherever.

But for that reality to become a reality, someone has to do a lot of work in the meantime because, contrary to what people might’ve thought [amazon text=George S. Clayson was adovcating in his book&asin=1897384343], the money doesn’t multiply itself unaided. Do people really believe that they can unintelligently, haphazardly and especially as in present times, anxiously invest their money in the stock markets and thereby wind up rich by retirement?

Another confused “investor”:

Andrew Schrage, a 24-year-old website editor, shifted the allocations in his $50,000 portfolio, away from equities and further into bonds, selling some of his technology stocks on Tuesday after announcements by the Federal Reserve that the central bank planed to keep interest rates near zero.

Mr. Schrage, who lives in Chicago, says he is planning to plow the money back into stocks, but is waiting for the right opportunity.

“This volatility has forced me to adopt a day-trading mentality,” Mr. Schrage says.

Wrong. The volatility hasn’t forced you to do anything, Mr. Schrage. It is your adoption of the fallacious belief that volatility is risk that has forced you into an uncomfortable position where you suddenly find yourself daytrading to try to avoid it.

The language of this article is curious. This 24-year-old website editor has $50,000 of capital in a financial market portfolio. Does he have $50,000 of capital in his website business? It almost sounds like he is a 24-year-old financial trader, who does some website editing on the side.

I don’t mean to heap scorn on age but it is fascinating that this young man has managed, in only 24 years on this earth so far, to not only find time to educate himself on how to edit websites but also on how to watch the Fed and trade accordingly. And this is, yet again, demonstration of the principle that this activity is pseudo-economic. It is not connected to real economic activity and any derivatives thereof but rather is driven by the moves and anticipation of moves by the central bank.

This is a centrally-planned economy, with centrally-planned financial markets. The trouble for most people is that the central planning aspect is too subtle for them to notice, being obscured under numerous layers of propagandistic “this is free market capitalism” rhetoric.

Nearly finished:

Dan Nainan, a 30-year-old comedian, spent Tuesday in his New York office fixated by the market fluctuations, refreshing the screen on his online brokerage account every couple of minutes throughout the day. About a half-hour before the close of trading, Mr. Nanian sold $120,000 worth of his Apple stock. “I felt a tremendous sense of relief,” he says, “and I’m not buying again.”

In a choppy market like this one, a single lunch meeting or conference call that results in missed trading opportunities can translate into thousands of dollars in losses. Andrew Clark, a 30-year old, real-estate consultant in Birmingham, Ala., sold about half of his Apple Inc. stock on Monday morning after it opened 3.2% down. During a client meeting, he missed a brief rally when the stock went up 1.7%.

“I would have bought those back at that point,” Mr. Clark says. “If you aren’t glued to these movements, you miss so much.”

What other times and places have seen 30-year-old comedians with $120,000+ stock portfolios? These are interesting and unusual times.

Andrew Clark’s comment is instructive because he believes he knows what he has missed when he really hasn’t got a clue. He’s missed Ben Graham. He’s missed out on observing the impact of frequent trading commissions on his bottom line. He’s missed out on the fact that his whole investment strategy revolves, admittedly, around the sure-fire failure of selling low and buying high.

Millions of people like this are born in every generation. They have no way to learn their lessons except by experience. Even then, if their experiences aren’t severe and near-death enough, they’re prone to forget them. They drift idly around during their blissfully ignorant existences like gnats above the highway. If the macroeconomic conditions are just right and they’re presented with the opportunity, they’ll launch themselves straight into the windshield of a market panic and spend the rest of the cruise down the motorway of life wondering how they got there and bemoaning the loss of their more innocent days.

These are people who would probably do just fine managing their personal affairs in more humble, honest economic settings. That’s part of the true villainy of the Bernanke-ite economy, to tempt all these people with fleeting prosperity at the risk of utter ruin, and to do it all at the point of a gun.

After all, who would play these games and take this farcical economic structure seriously if they were free to leave at any time without threat of going to jail, or worse?

Here we arrive at the moral, and the conclusion.