In a Previous Life

The easiest way into Wall Street is by the Hall of Delusions, through which many have entered who forgot to return. That door stands always wide open. No legend of warning affronts the eye. There ought to be one, and it should read: ‘No Safe Conduct Here.’
Garet Garrett, Where the Money Grows, Harper & Bros, 1911

 

In the pages you will read here, we hope to do two things; we hope to pin the notice recommended by the estimable Mr. Garrett to the entrance to that perilous passageway and we hope to explore the latter-day labyrinth beyond it without being sacrificed to that strange creature who resides there, not a Minotaur exactly, half-bull, half-man (he and his ilk work for CNBC these days), but maybe an ‘Arcturotaur’ – half bull, half-bear.

To give you a little background, the two of us have worked in and around financial markets for some little while now in that other great Hall of Delusions, the City of London. The pretty one worked as a futures trader on the Liffe floor – including a spell as a local and then as a desk broker, since the exchange first opened in the early 80s. She has seen it all at its most screaming, shouting, in-your-face intense. Along the way, a feel for the market and the people in it was bound to rub off.

The less photogenic one, for his part, took a little longer to earn an honest living and spent time studying Science and Engineering before arriving in the City in those heady days of the Super Dollar in the mid-80s, when the world would wait with bated breath and dealers would run not only their own books, but in-house sweepstakes, on the third decimal place of the monthly trade deficit (yes, it was always a deficit, even then).

When the march of technology and price competition from less established, Continental exchanges put paid to the old, raw capitalism of the open-outcry pit in London, she knew it was time to move on, that the buzz, or the feel for the ebb and flow of emotion that is a market, could never be experienced sitting at a computer terminal. She was looking around for an outlet for her wisdom and experience when along he came with the idea for what was to become Capital Insight.

He, meanwhile, had worked at a number of trading houses, dealing in money markets, bonds, futures, derivatives – even a little foreign exchange – but had always found most satisfaction not so much in trading – which, whatever you see in the movies, requires far too much hard graft and relentless discipline to be fun – as in trying to fathom out the whys and the wherefores at work in the game.

Next, for several years he tried to unearth the secrets while running the Global Markets section of a major independent research provider, where he had the opportunity to acquire a lay degree in orthodox economics by discussing matters and arguing the case with a whole host of the finest MSc and PhD economists from the best schools around the world.

These were all bright and savvy young people, but he always felt the discipline they followed was flawed – it was too mathematical, too mechanistic. Economics is a story about people, people working and saving and trying to satisfy wants and realize dreams. It is about traders backing a hunch, and entrepreneurs taking a risk. Today’s standard economics instead is about equations, linear calculations and clumsy aggregates. Standard economics doesn’t breath, doesn’t barter and doesn’t go long the Nasdaq ten minutes before a big economic release.

Standard economics, then, does not fulfil our need for a framework within which to think about our savings, our investments – even our speculations – and so too much of what we read and hear in the mainstream lacks an anchor. If it has any rigour, it is the rigour of a false doctrine. It has become ever less intuitive and ever more abstruse, like Ptolemy vainly adding circles upon circles to fit his misplaced theories of an Earth-centred Universe to the unyielding patterns of the heavens.

However, believe it or not there are better ways to think and better teachers to show us how.

One day, purely by chance, your author discovered a treasure trove, a repository of irrefutable logic and startlingly clear exposition – often tinged with a hint of polemic. He stumbled on the website of the Ludwig von Mises Institute and Capital Insight was no longer just the kernel of an idea, it had an intellectual foundation, it had the Great Masters of the so-called Austrian School to turn to and to reinterpret in the light of today’s events.

These were men who used no equations, just clear logic. Men who derided the blind statistics which today passes for knowledge. Men who showed the error of all those who attempt to hammer our individual actions and aspirations into the homogeneous mass of an ‘index number’ just so they can perform arithmetic on the result and dream up grand, interventionist plans, based on the outcome of their calculations.

The Austrians were men who understood the nature of money, the dynamics of exchange and who argued for individual sovereignty and for the paramountcy of the truly free, unhampered market as the only reliable method to increase the real wealth of the everyday people, whatever their skills or aptitudes.

To give you a flavour of this, here are some extracts from a piece we wrote back in Mid-2001:-

 

‘Money, once created, must after all end up somewhere, altering price relations as it does, and there are thousands of traders ready to effect this at the stroke of a key, reinforcing and even amplifying it as they leverage up and begin to display flocking behaviour.

Traders – of all people – are best placed to give the lie to the economic professors’ and central bankers’ fallacy that money is ‘neutral’ (altering all prices equally in the long run) and that aggregate prices are all that matter, rather than the interrelation of them. Men and women who ascribe to folk wisdom such as ‘Don’t fight the Fed’ are already aware – whether they realize it or not – that central bank inflationism drives prices higher (what else is a stock rally based in extra ‘liquidity’ all about?)

The guy on the desk who spends so much time tracking and exchanging information about money flows and position build-ups, not to mention anyone who does the same implicitly via technical analysis, knows that the path the money takes is as important as its destination.

‘Relative value’ traders and a wider class of arbitrageurs know that individual price relations matter critically to potential return – at least those not made slave to the pseudo-scientific sales gimmick of indexation.

Traders tend not to trust their in-house economists to assist them in their work, knowing intuitively that the mainstream discipline in which these well-meaning individuals have been inculcated is not up to the task. They know, if they cannot fully articulate thir certainty, that orthodox economics produces mathematically precise yet methodologically invalid forecasts of the next ‘number’ that are about as useful as a horoscope derived from a NASA star catalogue.

They are aware that between calculation and consummation comes cupidity – or in their argot, that ‘supply is only a problem in a bear market.’ They sense that, for all that successive generations of planners in the economic hierarchy might have wished, a doctrine which attempts to apply the methods of fluid mechanics to capricious, emotional humans is doomed to fail.

Traders – even the most dispassionate – know that what they do is not engineering, it is not even thermodynamics – but that it deals with subjective valuations, not quantities of one thing divided by quantities of another. Even the rocket scientists who build ‘black box’ models of vast computational complexity are simply attempting to distil short-term patterns of order amid a chaotic swirl of human interaction in which the single most important datum is price: fleeting, non-inductive, gut-feel individual price.

Many traders already suspect something is horribly awry with the establishment view of today’s market. Though we have long averred to the contrary and (can cite the references if asked!), they have been told, in turn, that this was a New Era and that Tech was not subject to the business cycle, then that it didn’t matter if the Dot Coms blew up. Next, it was only a manufacturing problem. When it patently wasn’t that contained, they were assured it would merely be a soft landing, then a ‘V-shaped’ recovery. Now it’s a ‘U’. And of course, inflation is dead and money supply is an irrelevance.

Well here’s to the bond market vigilantes and the stock market contrarians who demur. The first, who trust their instincts, and the second, who rely upon their company-specific forensic abilities, are trying valiantly to stop Greenspan et al from spawning yet another Bubble. Here’s to the gold bugs who hate paper money with a passion, preferring something tangible, and to the free bankers who don’t want their money to be anything issued by the State.

They may not know it, but they are Austrians to a man. ‘Yours!’ and ‘Mine!’ are the battle cries of the Austrian army of rational enlightenment. ‘

If that sounds like your sort of thing, we’d be delighted to have you aboard for the journey.

Oh and if you believe the standard spiel that Mr Greenspan and his colleagues in the world’s central banks are saintly men dispassionately striving to prevent the market’s failings from doing harm to ordinary folk, you’re in for an eye-popping ride.

The fact is, you won’t get the standard spiel here on much of anything from us. What you will get is our attempt to seek out the material and psychological factors which are most important in the given moment. What you will get is our perspective on how these can be integrated into a cohesive whole. You will get honesty, reason and the occasional heavy dose of irony – after all, just because this is important, doesn’t mean it has to be serious.

If you have persevered this far, we must have at least piqued your interest, so please take a few moments more to sample some of the work in our open access section on our Academy page.

Unconventional wisdom and original thinking. That’s what we hope to deliver.

Why not come and join us as we try?