Having watched investors rise and fall over the past several years, we have some advice for anyone in the money management game: Trade Keynesian but speak Austrian.
Let’s quickly go over what these two terms mean.
Keynesianism, obviously, preaches that the government, through monetary and fiscal policy should act to counteract slumps by making money plentiful. In downturns, the government should happily go into debt to boost public works, and getting people back onto payrolls. Keynesians believe that the government can right the ship if it tries. And Keynesians generally look at the big picture of things, breaking down GDP into a few key components that can be pumped or diminished as needed. Micro issues are not of major concern. “Reform” is a distraction.
Austrians on the other hand think all this government intervention is a recipe for disaster. Monetary policy only inflates bubbles, and government spending leads to government insolvency. And before all these bubbles and insolvencies happen, these attempts to fix things only lead to distortions and mal-investments that make the economy weak. Left to its own devices, the private economy would right itself. The government just needs to get out of the way.
So what does this have to do with money management?
You see, successful money management involves two things: Making money through good investments is part of it. But before you can make it, you actually have to go out and raise it.
How do you raise it? Well there are all kinds of ways, but in the money management business, one popular way to do it is to tell a story. And one of the best stories to tell is the Austrian story that goes something like this….
The government is full of idiots. They confiscate your money and spend it on their crony, corrupt projects. They’re ruining your kids future by making you go broke, and they try to stave off this day of reckoning by inflating bubbles and debasing the currency.
Just look at this chart of the silver content in Roman coins to see that currency debasement is what dying empires do.
The US is therefore a dying empire that will pay its price. So you need to protect yourself!
That’s one popular way to raise money: By speaking Austrian.
But once you start trading, the game has to change.
Austrians like Peter Schiff got clobbered in the financial crisis, because his framework couldn’t comprehend how when the economy collapsed, gold plunged and the dollar surged. He’s been calling for yields to surge, because the Austrian framework predicts that America’s sky-high deficits will cause a debt crisis.
Other investors who have been warning a reckoning for America, like Bill Gross and John Hussman, have similarly tripped up.
So the game is to trade Keynesian. Government spending isn’t a reason to dump bonds. Yes, GDP can improve when the government tries to stimulate. And when governments try to cleanse themselves through austerity and hard money, they actually make things much worse, as is happening in Europe.
Hence the game is to speak Austrian to raise money, and trade Keynesian to make it.
Of all the investors we’ve seen, probably Jeff Gundlach does this best.
His presentations are filled with big historical warnings about spending, and whatnot. He talks about what ab big issue they are. And yet he’s made a fortune betting on US government debt at times when other investors were saying that bonds were in a bubble.