BALTIMORE – This morning, bitcoin took a dive.
From an all-time high of $17,899… it tumbled to $14,336 – a 20% fall.
What a wild ride!
Our theme this week includes a warning… a not-so-subtle memento mori for the financial world: Put on your seat belt!
But today, we dig deeper to answer a question almost no one asks: Why are most modern economists such nincompoops? The quick answer: because it pays.
We blame Claude Henri de Rouvroy, comte de Saint-Simon… along with many others.
In 1760, Saint-Simon was born into an aristocratic family in France. He had a talent for broad, moronic ideas.
But he was remarkably untalented at suicide. Disappointed by the lack of success of his writing, he shot himself in the head six times… and lived!
Yet, with French philosopher Auguste Comte, Saint-Simon developed an idea that, like a malevolent weed, flourished: positivism.
That was the late 18th century. By then, it was obvious that “positive knowledge” about the natural world could help us live better. The Industrial Age was just beginning. Progress was undeniable.
So why not apply the “positive knowledge” idea to personal relationships, business, government, and culture? Wouldn’t that make things better, too?
But the relationships between people are not as simple as the relationship between a nail and a hammer. You can beat on people, too. But it’s hard to drive them straight where you want them to go.
And in the 250 years that have elapsed since – in which the propositions put forward by positivists were exhaustively rehearsed by governments, activists, and world improvers – no persuasive evidence of any real improvement has emerged.
Society evolves as people develop new ideas, products, inventions, and ways of working – mostly voluntarily – with one another. One buys his bread from the corner shop because he likes the salesgirl’s pretty red hair. Another orders his cement from across town because they give him more time to pay. A third fancies a new watch powered by his own body heat.
Then, along come the feds. Imposing their own rules and policies, preventing the free give and take of a free economy, setting prices, requiring licenses, blocking competition… all in the name of making the world a better place, of course.
In their most ambitious forms, they launch sweeping programs to reorder social and economic relationships according to the fads and fashions of the time. We will all now wear Mao jackets… the intellectuals will plant cabbages… a pound of beef and a pound of steel shall bear the same price… we will speak Esperanto, tie our shoelaces together, and hop to work… and wear our underwear on the outside so the authorities can verify that it is clean!
As far as we know, every effort to consciously remake society has been a disastrous failure.
At best, they have had outcomes that can’t be measured… or proven one way or another.
In the 1930s, the positivist doctrine was given a boost. Thinkers assembled in Vienna, Austria, made an impression on an English visitor named A.J. Ayer. The 24-year-old hurried back to London, wrote about it, and became the enfant terrible of English philosophy – promoting “logical positivism” however he could.
This school of thought – which attempted to reduce all human behavior to logical and scientific foundations – became so popular, it filled the universities, sloshing over department walls like an overflowing septic tank, and poisoning many other disciplines – notably economics.
Today, practically all economists believe they can assemble “data,” manipulate rates and rules, stimulate an economy, or calm it down… and thereby make things better.
These are convenient thoughts for someone who is looking to get money, power, and status without adding to the world’s wealth.
And now, inspired by positivism, three generations of economists have earned their livings and reputations by consciously applying logic and reason to make human economic relationships more fruitful.
They no longer question it; it is as though it had come from the mouth of God Himself.
But it wasn’t God who pushed positivism; it was the aforementioned A.J. Ayer, who taught at Bard College in New York and who, at the age of 77, distinguished himself in an encounter with an American prizefighter at a party in New York.
According to reports, Tyson was trying to impose himself on fashion model Naomi Campbell. Ayer tried to intervene.
“Do you know who the f**k I am? I’m the heavyweight champion of the world,” said Mike Tyson.
“And I am the former Wykeham Professor of Logic,” Ayer replied. “We are both pre-eminent in our field. I suggest that we talk about this like rational men.”
During the conversation that followed, Ms. Campbell is said to have slipped away. The effects of the discussion on Mr. Tyson went unrecorded.
But Ayer is best remembered for his judgement on his life’s work. Late in life, he was asked about positivism’s shortcomings.
“I suppose the greatest defect,” he replied, “is that nearly all of it was false.”
Modern economists have preached and practiced intervention and activism for the last 50 years.
It has enabled them to earn decent incomes… win Nobel prizes… pretend to know what they were talking about… and exert huge influence on their victim economies.
None of it made people richer or better off. Instead, it was all fraudulent and futile.
But having made such a striking claim so much at odds with the accepted wisdom of the world’s leading economists, obviously, we carry the burden of proof.
We dispose of the burden in a couple of sentences:
Economies discover wants and prices by allowing win-win deals. These deals discover both what people really want… and how much it really costs to get it. The feds – aided and abetted by their positivist economists – just get in the way.
What about it, Mr. Bernanke? Ms. Yellen? Mr. Powell?
Mr. Ayer has set a good example. Care to make a confession?
By Jeff Clark, Editor, Delta Report
Bank stocks have been on FIRE.
The KBW Bank Index (BKX) – a basket of 24 banking companies – gained nearly 6% just last week alone. That’s a remarkable one-week move, especially considering that the banking sector was lagging the market all through November.
Last week’s action more than made up for it. The banking sector did more than “play catch-up.” BKX busted out to a new all-time high on the move. Take a look…
The Federal Open Market Committee (FOMC) gets the credit for the recent buying interest in banking stocks. Investors expect the FOMC to raise short-term interest rates after it meets next week.
Banks tend to benefit from higher interest rates. So traders bought bank stocks in anticipation of that event.
But if you’re chasing bank stocks higher today, then you’re making a mistake. You should have a better opportunity to buy once the FOMC announcement is out of the way.
Take another look at that chart of BKX. The red arrows mark the two previous times this year that the FOMC raised its interest rate target. Bank stocks sold off, hard, after each of those announcements.
The bank stock index fell 6% within one week following the March rate hike. It fell more than 3% within two weeks following the June decision to raise interest rates.
My point here is that the market anticipates FOMC rate hikes. Traders buy bank stocks in anticipation of a rally going into the FOMC meeting. Then, traders sell the bank stocks on the news.
Last week’s huge rally in bank stocks was largely the result of the market anticipating another interest rate increase following the FOMC meeting next week.
The “news” of an FOMC rate hike is already baked into bank stocks. Once the rate hike occurs, bank stocks are likely to sell off – just as they have following previous FOMC decisions – as traders exit their positions.
– Jeff Clark
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Latin America Is Gobbling Up Bitcoin
As Bill has been writing all week, we are in the midst of a cryptocurrency craze. But in Latin America, where the residents know a thing or two about hyperinflation, the crypto craze might not be so crazy…
Why Big Tech Loves the GOP Tax Bill
Congress is on the verge of passing a massive tax overhaul. And some of America’s biggest tech companies can’t wait. Here’s how much companies like Google, Facebook, and Amazon stand to save from the GOP bill.
The Truth Behind the Crypto Mania
Cryptocurrencies are on everybody’s mind. What’s causing the massive spike in bitcoin and other small cryptos? Bill’s top technology expert, Jeff Brown, has the answer.
In the mailbag, the conversation is all bitcoin…
Perhaps bitcoin’s rise is about people’s financial anxiety rather than anything else. A logical person can see that our markets and our currency do not correlate to a meaningfully backed measure of value.
As out of whack as the bitcoin speculators seem to be, nonetheless, bitcoin is a big vote against the status quo of making anyone feel secure. So it’s another carnival barker, or we’d best own some of it.
– Michael C.
Ol’ Bitcoin and 1,318 (and counting) other cryptocurrencies. Yep, that’s limited money, alright! And the government can’t touch it! How long do you expect those sons of perdition to sit on the sidelines? Bill is right. Money isn’t worth it. Y’all go on ahead without me. I’ll be fine right here.
– Paul M.
And readers of our own Chris Lowe’s Inner Circle weigh in on the crypto conversation…
I read all your materials on cryptos with interest and maybe a little different perspective from many. I’m approaching 70, and maybe through divine insight, I took $5,600 of an inheritance in July 2016 and invested it in ether and bitcoin. Not a bad decision.
I’ll admit I added a couple thousand in early 2017, but my total investment is under $10K. I retired in April of this year, and for living expenses during the summer, harvested some of my appreciated crypto assets prior to their time, in full knowledge of that fact (but keeping my wife happy and secure, and not tapping into my more gold-related investments which definitely weren’t ready to tap into). This gave us more than ample living expenses through the summer until I switched to a few stocks that had ripened.
In all, I’ve sold between $15–20K, well above my original investment, and my remaining pool of cryptos (now house money only) is $150K or so, diversified among about 15 mainstream cryptos, although still concentrated in bitcoin and ether (no speculations, no ICOs).
From a crypto geek’s standpoint, I probably would be seen as a geezer with the way I’ve invested (buy and hold, mainstream only), yet the results aren’t too shabby. Next time bitcoin really spikes, I may sell some more and add to my gold just to cash out a bit more into hard assets.
– Byron S.
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