About That Whole End of the World Thing….

I spend a lot of time here talking about risk management and avoiding investment pitfalls.  I describe the climb to the top of the investment mountain as one that is strewn with loose rocks and dangers.  I like to say “butterflies and rainbows don’t ruin your day” because the climber who spends his/her time focused on nothing but the beautiful scenery is bound to get tripped up.  In the investment world, it’s the loose rocks that set you back.  And as I’ve shown previously, the unfortunate math behind investment losses can mean you literally lose years of your life’s savings due to these setbacks.

But there’s an even more important lesson here than the one involving risk management.  You have to be willing to get on the mountain and actually make the climb.  Standing there on the sideline watching everyone else climb, fall or reach the summit isn’t going to help you get there.  You have to be willing to take some risks in the first place.  And in order to to do so you have to have a certain level of confidence in your capabilities to get you to the top of the mountain.  Whether you like it or not, that makes you an optimist.

I bring this up not because I am some sort of blind optimist, but because we remain in this post-crisis era where fear seems to rule every day and the end of the world is right around the corner.  If it’s not the Euro crisis, it’s the fiscal cliff or the hyperinflation or the bond vigilantes or any countless other number of things that are going to destroy the world.  But the truth of the matter is that the vast majority of the time the world is making progress.

Did you know that the US economy has been in expansion 84% of the time since 1945?  That’s right.  Whether the pessimists like it or not we’re still climbing that mountain.  And there are going to be measured optimists who make it up there regardless of how scary the headlines are.

So the question is, are you willing to overcome the fear and put your climbing boots on?  Or are you going to buy into the perpetual fear machine that is modern life?  Just remember – should you choose to make that climb…butterflies and rainbows don’t ruin your day.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Here is my view of things.

    I am very optimistic about my skills and abilities, but I have grown pessimistic about the way the world economy is managed by central planners, who have only their own interests in mind and sell to the highest bidder.

    The market is ruled by fear, but this also means that it is climbing the wall of worry – a paradoxon. The VIX is low, but the OTM left tail VIX 6 or 12 months out is extremely expensive. The market knows that the central planners’ current suppression of volatility, will be offloaded at one future point with even more vengence. That is because volatility currently is suppressed in an artificial way without addressing the structural problems in any meaningful way. And the markets sense that. But this means that the wall of worry will continue to be climbed until another Lehman-magnitude crisis hits.

    Finally, one can be consiously standing by and watching the futile efforts of the “climb of the markets” – a futile attempt for many, as the equity return since 2000 is about zero prior to inflation and how many people have beaten the market? But I agree that if one is in cash it needs to be an active decision and be constantly reevaluated.

    I personally have put my cash to work by purchasing a house with leverage and look to add to gold and silver once they drop a bit more for a bounce 8secular peak may have been reached last year). Additionally I am preparing my list of stable growth, high dividend stocks (the ones Warren Buffet likes) to purchase after a renewed bear market coming in the next 1-2 years.

  2. Warren Buffett : Be fearful when others are greedy, and be greedy when others are fearful.

  3. Because the whole circus is a rigged game that deserves to be
    Burned to the ground, I’m going to just go right on ahead and stay
    Down here with boots off. Meanwhile I’ll be throwing as many rocks
    As I can at those idiot climbers and strivers. They’re part of the
    Problem.
    Rufus

  4. “I’ll be throwing as many rocks
    As I can at those idiot climbers and strivers. They’re part of the
    Problem.”

    Yes, god forbid one should strive for financial independence and success…much better to wallow in defeat and look to the “govment” to take care of us all….

  5. Nice post, X! I agree with much of your thoughts and your investment strategy are very wise indeed…

    Unfortunately, much has changed his 1945…I though we had defeated Communism but apparently I was wrong…

  6. Thank you for the link, Mr Roche! It is a very long read, all 43 pages of which I have only consumed three.

    So far I am pleased with what I have read about MMT and that which was my first reaction, after becoming somewhat familiar with it…

    I have bookmarked for later reading when time permits..

  7. Whoa, is my memory playing tricks on me or is this much more different from MMT than it was about 1 year ago? (I think it was called MMR then)?

    I skimmed this doc and will examine in more details when I get around to it. In the mean time, do you have a high level summary with core conclusions and views of MR?

    I’m trying to understand what it still has in common with MMT and how it differs with my own views (http://catalystofgrowth.com/theory/fiat-currency-construction/)

  8. Agreed but I agreed with most of what I read and the documents are quite big. Would be nice to have a way to fly over the majority that’s already agreed upon and zoom in on the controversial points rather than have to read all the tedious details.

  9. DOB,

    Sorry for the late response. I argue that MMT is right only in theory. In reality, what the US govt chooses to do is outsource the creation of the US Dollar to private banks. So the US govt chooses to be a user of the dollar. MMT argues that the USD is the domain of the govt and is a creature of the state. I argue that this is only right in theory and in order to be accurate, would require a substantial overhaul in the way our monetary system is designed. Specifically, the Fed would need to become a part of the state and the banks would need to be nationalized. In essence, MR starts from this understanding and builds out to explain how the govt is, in keeping with a market based capitalist economy, a facilitating feature designed around private banking.

    There are some other larger problems within MMT, but that’s the biggie. Obviously, the paper I wrote is rather mundane and arduous, but this is not a small matter so it’s hard to explain thoroughly in small pieces….

  10. Well, if one adds up America’s cumulative trade deficits and budget deficits since 1971, it is clear the majority of this ‘growth’ referred to is but an illusion funded with debt on the back of other productive countries.

    And that will come to an end, the world is ready to let the US hang itself.

    Don’t believe the sell-side, they have something to sell you!

  11. I disagree that banks would need to be nationalized for us to live in an MMT/cartalistic world: it suffices that the Fed looses its independence/mandate to set interest rate according to a criteria that is unrelated with the government’s funding needs.

    But regardless, MMT fails to recognize the impact of interest rates on aggregate demand / the price level. To me that’s the biggie within MMT. In fact it’s so big, I’m don’t think there’s much left to keep of MMT.

    Could you elaborate on this statement:

    Although we find that MMT is incomplete, [..] their description of the monetary system [..] is far superior to the neoclassical models.

    Which neoclassical models are you referring to? I’m pretty sure that for all their faults, everyone from neo-classicals to neo-Keynesians very much understands the impact of interest rates on AD. The fact that MMT has gotten it completely backward precludes them from being called “superior” to these other paradigm IMHO.

    I say this even though I had a similar experience to yours with MMT: learning from it and then growing out of it.

  12. DOB,

    I think you’re right. It is a major fault in MMT that they don’t appreciate the power of monetary policy and interest rate changes. The vehement denial of any impact of monetary policy is one of the major flaws in what is really a pure fiscalist view in MMT. I think one of the major reasons MMT is catching on right now is because monetary policy has been (temporarily) rendered powerless (or less powerful). This is a case of recency bias in macro….

    When I refer to a flawed neoclassical model I primarily refer to the lack of banking in the models. For instance, Scott Sumner has said he doesn’t even understand modern banking. Krugman clearly doesn’t understand modern banking. So we’ve got the New Keynesians and the Monetarists both misunderstanding banking. To me, that’s an enormous hole in these models. How can you have a monetary system that is designed entirely around private banking and economic models that are almost void of understanding it? That blows my mind….

    Thoughts?

  13. Hi Cullen,

    Agreed on the recency bias. It’s sad that everyone is making such a big deal about the zero bound when there really isn’t one.

    I’ve thought long and hard about banking systems, but ultimately, the key difference between the banking system as we know it and a system where private citizens trade IOUs with each other settled in base money (reserve ratio = 100%) is the government guarantee on deposits and the slew of regulations that come with it. I think those are huge in terms of fiscal liability, economic distortions, etc. in fact I think they caused the financial crisis. But they’re not *that* interesting in terms of impact on aggregate demand/price level.

    From a normative standpoint, I think we should get rid of the banking system and replace it by this. From a positive standpoint, I don’t think Sumner is missing *that* much by glancing over the banking system but I’m open to being convinced otherwise.

  14. MMTers are fiscalists. They want to steer the economy through fiscal policy. It’s a policy based view of the world that centers around their job guarantee. If MMT admits that monetary policy works then there’s no need to consolidate the Fed and Treasury and focus on fiscal. But MMT needs to consolidate the Fed and Tsy to be right. Otherwise, they’re two separate entities serving two different purposes. So MMT essentially eliminates the role of monetary policy and the Fed. You’ll never get them to admit that monetary policy can work because it’s against the basis of the entire theory. So, you’re wasting your time talking monetary policy with them. They’re 100% convinced that monetary policy can be disregarded in favor a pure fiscal approach.

  15. “They’re 100% convinced that monetary policy can be disregarded in favor a pure fiscal approach.”

    in other words they think you can just shift the economy into hi gear with no need of an accelerator or brakes?

  16. It’s one thing to argue that one should use fiscal policy over monetary policy (I have plenty of arguments against that too..), it’s another to reject the effects of monetary policy and conclude that fiscal policy is the only choice by default.

    Reading Warren’s book a while back (7DIF) got me convinced me that he’s not an idiot: his thinking is logical, he just missed a step. It’s definitely possible that he’s too vested into MMT as it stands to even consider the possibility that it could be missing something.

    Given that he contributes his knowledge in an open forum, I think it’s fair to bring the counter argument to him. Will probably give up soon though, given that he’s only given me vague responses, not nearly as articulated as his book.

    Agree that the other MMT leaders are probably too far gone and are highly influenced by their political views.

  17. I am fully convinced Mosler’s brilliant. Bear in mind – he came up with MMT without having ever read Keynes, Minsky or Godley. That’s no small feat.

    He deserves a huge amount of credit for moving the discussion forward.

  18. DOB, I think your spot on about: ” It’s definitely possible that he’s too vested into MMT as it stands to even consider the possibility that it could be missing something.”

    This is why I Respect Cullen’s Prag Cap more, for shifting course when things just didn’t sound right.

    Mosler on the other hand started charging a fee. I thought he seemed pretty smart and all and liked for the most part what he wrote.

    However, I have come to appreciate Cullen and the Prag Cap/MR view because there just seems to be more about a descriptive way of understanding how the system works first and foremost.
    And secondly only discusses and debates economic/political prescription’s as a side note.

    So like ya said, I agree and think some in the MMT crowed have a lot vested which makes it hard to admit error of one’s ways.

  19. @Cullen,

    I am fully convinced Mosler’s brilliant. Bear in mind – he came up with MMT without having ever read Keynes, Minsky or Godley. That’s no small feat.

    I’d say I admire Mosler more for his ability and effort to express his ideas clearly (in his book, more so than his blog) and gather a community around them, than because he refused to invest time to examine the work of the giants whose shoulders he stands on. Reinventing the wheel isn’t particularly socially useful.

    As it turns out, he missed something that was fairly explicit in their work which completely invalidates his conclusions. Moreover, he seems too close-minded to see it when people point it out to him.

    @Cowspoke,

    This is why I Respect Cullen’s Prag Cap more, for shifting course when things just didn’t sound right.

    I know exactly how that feels :)

  20. We also didn’t just shift course when creating MR. We created something new. The MR description of the money system did not exist so it’s not exactly like we were wrong and then flip flopped to some other position. We evolved to something new.

  21. We also didn’t just shift course when creating MR. We created something new.

    Either way Cullen, the willingness to re-evaluate prior beliefs and change your mind, whether a minor course correction or an overhaul, is what Cowpoke & I agree is very healthy.

    Warren has deleted my latest response on this thread and asked me privately to discontinue the debate.

    That settles that..

  22. Not surprising. We’ve had comments deleted when they don’t agree or say things that proves MMT wrong. That’s part of why I don’t comment on their sites.

    I also don’t understand why some people have a problem with our moving from MMT to MR. It’s not like we flip flopped to something. We created a position and explanation that didn’t previously exist. Our thinking evolved….you’d think that self proclaimed “progressives” would applaud that!

  23. That’s quite disappointing of them. I don’t think that’s good blogging etiquette…

    Granted I disagreed, but I don’t think I was rude or inappropriate. Reposted here for the record.

    In a way, their use of censorship is befitting of a group that wants the government to play such an central and powerful role..

  24. When an MMTer says interest rates have no influence over the business cycle just ask them why 9 of the last 10 recessions have been preceded by an inverted yield curve. That usually quiets them pretty fast. :-)

  25. They’d probably argue that the inverted yield curve brought expectations of lower interest income and therefore caused the recession :-)

  26. (I hit the wrong reply button)

    They’d probably argue that the inverted yield curve brought expectations of lower interest income and therefore caused the recession

  27. “In a way, their use of censorship is befitting of a group that wants the government to play such an central and powerful role”..
    Amen DOB, Amen..