==> Jeffrey Rogers Hummel on backdoor reserve requirements via Basel. BTW, I don’t like the Alchian & Allen argument that Jeff quotes; I think it gets things backwards when it comes to the function of reserve requirements. But that quibble aside, Jeff is an encyclopedia on the details of central banks.
==> OK North Dakota has given the green light to weaponized drones on U.S. soil, but not lethal weaponry. But if the government ever deploys its flying killer robots on U.S. soil, then it will be time to start complaining about liberty.
==> I realized from Levi’s comment that people are genuinely misunderstanding what I was trying to say in that op ed. I’m not going to try to go through it all right now, but check this out. Back in 2013, Ryan Murphy (no relation) was teasing me in the comments here, saying that I should be rich if I know the Fed is driving the stock market. I brought up that guys like Mark Spitznagel made a boatload of money from the two previous crashes, and Spitznagel is heavily guided by Austrian capital and business cycle theory. (Disclaimer: I was a consultant on that book.)
Ryan then said well let’s see how he does in the future. OK, thanks to von Pepe, I see this WSJ story that Spitznagel’s Universa Fund made a billion dollars on Monday (up 20% for the year). Does that count as “profiting from a prediction”? And no, if I understand his portfolio construction, he didn’t give half of it back later in the week, because he didn’t short the S&P, instead he bought deeply out of the money put options. (Click through to the article if you want more details.)
To be clear, I’m not saying, “The scientific validity of Austrian business cycle theory rests on the shoulders of Universa’s 3q performance relative to a passive mutual fund.” And yes, maybe Spitznagel just keeps getting lucky. My modest point is that if you think you can dismiss my perspective with a one-liner, you’re really not even trying to appreciate what I’ve been saying.
I got this inquiry, with permission to post here:
Message: hey mr. murphy,
i am a junior in high school and this fall, ben bernanke will be speaking at my school. as a follower of yours, i agree completely with your views, and love your wit. i expect that after his speech we will be allowed to ask questions, i was wondering if you had an idea for a question that could really trip him up…
For the record, I do not endorse tripping people.
I am really going to drop it after this, partly because we have devolved into metal chair bashing, and partly because I plan on doing some technical papers while at Texas Tech, and Scott may be one of the few bloggers who appreciates them…
Anyway, in this post Scott first lectures me on how the EMH is falsifiable. Right, I know the academic EMH in the journal articles was falsifiable. What I claimed in my post is that in practice it is non-falsifiable.
What do I mean? Check out this screenshot, showing the comments under Scott’s post:
THAT is what I mean when I say in practice, the EMH is non-falsifiable. We could have the stock market drop 40% in a year, have major investment banks fail, and enter the worst world economy since the Great Depression…and still Scott would be high-fiving his audience when they say, in a Joe Pesci voice, “What? Where’s the problem? Minga, you Austrians act like the market did something.”
(And actually, why does the Great Depression get such a bad rap? I mean, humans went to the moon afterwards. How bad could it have been?)
If you want to believe in the EMH, I’m fine with that. But don’t think it keeps passing empirical tests with flying colors, if you’re using it the way most people on the internet are (including Fama).
The footage of us lecturing comes from a February 2015 workshop we put on in Birmingham. I realized that you guys don’t understand the quite specific presentations my co-author, Carlos Lara, and I have been giving to audiences during the summer. No, I wasn’t telling them, “I expect a spike in the VVIX on Monday, August 24,” but I certainly gave them the big-picture theory of the boom-bust cycle and then reasons that I thought Yellen was going to hold pat and let the market go down. (For purists, I made clear the distinction between Austrian business cycle theory, and my personal guess that Yellen was going to let a crash happen before launching a QE4.)
I have work to do for clients, so let me just quickly say that I regret not a single word of this 2011 piece, which Scott Sumner somehow thinks is damning. (Hint: I was telling people that the stock market was being driven by the rounds of QE. What has happened since then is entirely consistent with that theory. So if you think the Fed can just keep quintupling its balance sheet every 7 years, I grant you, there’s no reason to be wary of the U.S. stock market.)
So if I promise to criticize myself, can I get a blogging gig at EconLog?
I understand the Efficient Markets Hypothesis, and I think it’s a very good way to take a first crack at the markets. The thing that annoys me about many EMH proponents is that they think they are being empirical and scientific, when they often are clearly able to explain any outcome in their framework. Steady growth? Just what EMH predicts. Massive crash? Just what EMH predicts. In practice, the EMH is non-falsifiable, which is ironically the criticism many of its proponents level at others.
I think this following passage from Scott is a tad slippery:
Murphy seems to suggest that the fact that Austrian economists were not surprised by the volatility is a point in their favor. But why? Who was surprised? If you had asked me a year ago “Do you expect occasional volatility, up and down?” I would have said yes, and also that I had no idea when that volatility would occur, or in which direction the market would move.
Look, there was nonstop coverage of this on NPR when it happened. They were trotting out all kinds of people, including Austen Goolsbee, to make sure Americans kept their money in Wall Street. I’m not making this up, give me a break.
Monday showed the biggest intraday point swing in history. (Granted, you would want to look at percentage swing for a better comparison, but I can’t find such a ranking.)
And according to this guy’s analysis, by one measure of market volatility–the VVIX–Monday blew the previous record out of the water:
If you want to say I’m a broken clock, or that we should wait and see what things look like in three years, etc., that’s fine. But come on, don’t act like predicting “more of the same” two weeks ago is consistent with what just happened.
My latest at FEE. An excerpt:
To illustrate the shortcoming of a naïve natural scientific perspective on these issues, consider an anecdote from my high school years. I remember that my biology textbook asked us to consider a petri dish with a population of bacteria that would double every day. By stipulation, the bacteria would completely fill the dish — and thus hit the ceiling of its “carrying capacity” — on the 30th day. The textbook then delivered the stunning observation that on the day before this crisis, the dish would only be half full. The textbook’s point, of course, was to warn that trends in biology were not linear, and that crises could develop rapidly out of apparent tranquility and abundance.
If my classmates and I learned this principle in high school biology, then presumably at least some traders in the Chicago agricultural commodities markets have thought about it, too. If Earth’s population will grow more rapidly than food production over the next decade, then the spot prices of wheat, soybeans, and beef will eventually skyrocket as the crunch sets in. If the crisis of population growth is “obvious” to academics the world over, then this growth would be factored into market prices and food prices would already be high in anticipation of the future disaster.
My article at The Daily Caller explains how the Austrian perspective prepared many analysts for the recent market volatility.
==> “The Fed and Oil Prices.” This posted Monday morning, and I actually wrote it in mid-month. (You can tell from the opening news hook, which doesn’t mention the U.S. stock market.) Anyway, a neat chart in there showing Fed’s balance sheet versus oil prices.
==> I continue to push back on Sumner’s “what bubble?” approach.