How to profit from being an Austrian

Miscellaneous General
1

I have been investing and studying economics for many years and my bookshelf is stuffed with all the major works of the Austrian school. While I believe that the Austrian school comes closest to providing an accurate, holistic, and self-consistent explanation of what is actually observed in the real world, the reality is this: The goal isn’t to be “Austrian”, the goal is to be “accurate” (by which I mean: “True to the observed behavior of the real world”). To paraphrase Milton Friedman: There is no such thing as Chicago economics, Austrian economics, or Keynesian economics - there is only good economics and bad economics. Economics, Austrian or otherwise, is a means to an end - the end is the accurate explanation of what’s actually happening in the real world.

Those who have a more accurate understanding will have an advantage over those who have a less accurate understanding. If in fact the Austrian approach is more accurate at explaining what we actually observe in an economy, then those who understand it should have an advantage over those who don’t.

This advantage should be monetizable.

There are many actors in an economy each acting according to their own evolving worldview. Therefore any particular quantity (prices, cashflows, transaction types) will be the sum of multiple, perhaps conflicting, forces. This is what makes it difficult for someone to consistently monetize trends since, even though they may have correctly deduced a particular long-term or medium-term trend, multiple shorter-term trends are superimposed on it along with purely random events.

However what’s unique today is that we are living through a period where the government is executing a series of economic distortions on a scale that has not been seen since the 30’s. The magnitude of these disruptions will tend to overwhelm other shorter-term and smaller-scale trends increasing the probability of predicting near-term future outcomes. Of course, large-scale government action will cause responses by other actors and on and on in a recursive fashion but some of these can be predicted as well.

Here are the major disruptions to date:

  • The supply of government bonds will dramatically increase.
  • The money supply has dramatically increased and will continue doing so in the near term.
  • Some fraction of this increased money supply will be used to buy government bonds and CDO’s.
  • Two major US industries, autos and finance, have been significantly distorted.

All of the above will continue into the foreseeable future.

If in fact Austrian economics is more accurate than other schools of economics, how can one use an understanding of Austrian economics to profit from these large-scale disruptions? For example, I have already profited from the increase in government bond supply (but the onset of quantitative easing will require a refinement of my technique).

Note that in some cases one can deduce “what” will happen with greater accuracy than “when” it will happen. However a person with a more accurate understanding should be able to deduce which intermediate events could signal that a “final” outcome is starting to emerge.

(Naturally I would funnel some fraction of said profits to the classical liberal cause)

Thoughts?

Austrian Investing
2

There are a lot of people making money with Austrian insights. They are also not front runners or drawing attention to their advantage in the department of market analysis. Yes, you can make money applying Austrian insights and analysis. However, just being competent in the Austrian school, is not the same thing as prescience. Respect for epistemelogical boundaries is a healthy disposition for anyone, doing anything, and most certainly, in investing.

3

An understanding of Austrian economics may adequately explain what has happened in an economy, but it does not allow anyone to see into the future and predict future economic events, [and to therefor make accurate investment/speculation decisions]- no more than a Keynesian, Classical, or other school of economic thought does, or any other supposed method for “knowing/predicting the future”.

Financial Safety Rule #1 says: “despite many claims to the contrary, no one, not even your favorite economist or investment advisor, can reliably predict future economic events…”

4

One big Austrian insight is to invest in gold and silver. This protects yourself from inflation.

If you’re an anarcho-capitalist or market anarchist (not technically Austrian), you can profit by operating unlicensed businesses and by ignoring taxes and regulations. If you ignore State restrictions of your productivity, you’ll outperform your on-the-books competitors.

5

Judging from this post, you should stay away from stock market speculation and investing in general. Focus on increasing the marketability of your skills and develop a strategy for increasing your income either through employment with others or self-employment. If stock market speculation (or commodities speculation or futures speculation or whatever) is your dream career, then I recommend you go educate yourself in the rudiments. While Buffet is full of BS when it comes to monetary theory, he has a solid understanding of how and why investors make money. In short, you have to know something (particular) about the world that is valuable and then you have to put your assets at risk to realize that knowledge. While Austrian economics will help you avoid many of the pitfalls and state-run con games that dominate the financial world, in itself, Austrian economics contains no particular knowledge about what customers demand and what resources are available at what prices to satisfy those demands.

Clayton -

6

(I meant for this post to be a reply to liberty student’s post)

This is the most “can-do” post so far. Per my original post, I have already profited from the current inflection point occurring in the bond market. I backed off after quantitative easing kicked in however quantitative easing (partially) converts the problem from a distortion in the bond supply to a distortion in the money supply (akin to trying to contain jello in your fist: you close up one hole only to have it squish out another hole).

Your point regarding “epistemological boundaries” is correct. Per my original post, I believe that the enormous magnitude of current government intervention (exceeding their usual distortions by orders of magnitude) brings this boundary closer to the “known” region and thus increases the probability of correct prediction. Said prediction never gets close to 100% of course but, simplistically, you only need to be right more often than you’re wrong (weighted by the magnitude of your bets).

Note that the current large-magnitude distortions can’t continue indefinitely since the market will react in a way that nullifies what the government is trying to do. For example: They can’t continue to sell $1T+ in bonds every year since bond buyers will demand ever-higher yields eventually causing debt service payments to overwhelm their budget.

Would love to talk to some of the “lot of people making money with Austrian insights” that you are aware of (I believe this site allows you to email me directly rather than having to post in public).

While I’m on the subject: For those interested in macro input to their investing, I recommend “Time and Money” by Roger Garrison. The most coherent and self-consistent exposition of marco I’ve encountered.

7

Had I stayed away from “stock market speculation and investing in general”, I would be substantially poorer.

8

We’ve been looking at this all wrong. The status quo isn’t going to change anytime soon… so the question is - how do we profit from the ability to foretell economic collapse? It’s the best way to promote liberty as well, by making ourselves personally wealthy so we can donate to the cause.

I recommend buying investing books by Austrian authors such as Peter Schiff, Chris Leithner and Jim Rogers. And I’m told that What every Investor should know about Austrian economics and the hard-money movement (1988) by Mark Skousen is a must read. Any others I’ve missed?

9

Ron Paul is a millionaire, thanks to gold holdings.

10

Austrian economics is a constructive science, not a predictive science. It can tell you on what foundations to build an economy, if your goal is to economize. If you adopt these principles, you will know that you have an economy but you will not know what it will do - its very purpose is to find this out.

You can use Austrian economics to build new economic systems. One example from recent years is the creation of Wikipedia. You cannot from that know what will be entered into Wikipedia.

You cannot use Austrian economics to predict what politicians will choose to do with the economic system they are entrusted with. You can only tell if the consequences of their actions will be economic or not. If not, you can broadly speculate based upon this knowledge, but the speculative risk remains. In the words of Keynes, the market can stay irrational longer than you can remain solvent. You may yet lose it all in the end.