Friday, February 24, 2012

MMT busting out into the mainstream!

In this video I offer my congrats to the MMT crowd for driving the movement into the mainstream.


Anonymous said...

One thing MMT has gotten very wrong is the rise in the price of gold.

Tom Hickey said...

@ Anonymous.

I didn't. I called gold a buy in the $750-850 range years ago and regard it as a cautious hold now. Gold is still a hold since the GFC is not yet behind us, but I would a seller at this level as more promising opportunities presented, that is, reduce the portfolio % of gold.

For example, the historical RE-gold ratio suggests that selective RE may be an option of interest. I recommended closing out RE in mid 2006, and the time is approaching to be aware of opportunities. Some friends are already in, with houses and mortgages. Again, very selectively.

I'm not a professional and this was only among a few close friends. Those who followed the warning did very well on two counts. Not only did gold outperform, but they got out of stuff that would have creamed their portfolios if they had stayed in too long. Those that didn't listen did in fact get creamed. But that was before I learned of MMT, and I don't think that MMT would have affected the call either way. MMT would just have confirmed the precariousness of the situation that I had already seen.

Traders trade on momo and perception and hedge against the spread between perceived value and fundamental value. But gold has little fundamental value other than industrial demand, so one is not playing wrt risk but uncertainty. Indeed, physical gold has a negative bias due to storage cost. There's really no way to assess the fundamental value of gold other than as a numeraire, comparing historical asset and goods price to gold price ratio.

There are a lot of factors influencing gold price, but the worrisome one since the advent of ETFs is the level of small fry holding. Increases is small fry holding tends to indicate the distribution phase has set it.

But I confess to missing the equities bull though. I foresaw the turn-around but expected only a bear rally with more punch left in gold. I never thought the government would go to the lengths it did not only prop up the market but to drive it up for the wealth effect, which the Fed admitted later. Again, I don't think that MMT would have influenced my view here either. But staying in gold was not a bad call either as it turned out, and who know where the GFC was going to lead.

In fact, I'd say we got lucky it's been as mild as it has. Could have been an unmitigated disaster and still could if another recession hits on top of this one, from which we haven't yet recovered. For example, austerity after the '12 general could do it for the US, and Europe is still not out of the woods. There are still wild cards floating around.

Chewitup said...

What does MMT have to do with the price of gold? Or orange juice or coffee or pork bellies or lumber? The only thing MMT could predict is Treasuries.
Unless you knew that QE was only an asset shift and a bunch of folks would shift their portfolios toward commodities.

Anonymous said...

I believe Mike has been a huge bear on gold (I suspect) because he made the mistake of thinking that gold is only an inflation play. Whether this call was based on his understanding of MMT I'm not certain. MMT is very unfirendly towards gold in general and this may have biased him. Congrats to Tom for his foresight.

Chewitup said...

I agree that some of the MMT folks have been cynical about shiny rocks.

Tom Hickey said...

There are two reasons that people go to gold. The first is fear of international financial breakdown, such as could easily have occurred due to the GFC had not government stepped in — and conceivably could still happen, although the risk is considerably diminished. A shock could still upset the apple cart, so I think somewhat increased portfolio gold holdings to hedge this risk is reasonable under the circumstances. Randy Wray, for example, sees the risk of a melt-down in the intermediate term as significant.

The second reason is fear of inflation and even hyperinflation. A lot of the gold mania is based on this. MMT shows that this risk is due to a misunderstanding of the modern monetary system.

Finally, some people think economically and financially in terms of gold as the natural numeraire. People that think like this may not be concerned with monetary inflation but rather energy price rises, which devalues currency in relation to gold. I personally think it prudent to also look at things this way, since gold is still the barbarous relic and quite few people think this way. Others use a unit of energy as the numeraire, and this is also a viewpoint to keep in mind in my view.

Leverage said...

Tom you forgot the biggest reason of why people go to gold: Market reflexivity.

I don't believe in crazy theories that gold is some sort of money from God some goldbugs have, but if I know goldbugs will be buying gold in mass so will I.

The same is being done by big funds and specially (investment) banks: with CB liquidity injections and reflating policies banks buy gold, they make gold rise and then they sell high to goldbugs and other silly-money at a profit (same with other commodities).

It's the same thing with treasuries etc. market manipulation by CB-banking complex so they can obtain a profit, with that profit they can both: recapitalize and have sweet bonuses and income that otherwise they wouldn't be able to have due to the financial collapse 4 years ago (as Soros says, people does not realize the system has already collapsed, we are in the aftermath).

Tom Hickey said...

Leverage, I agree as a trader, but I don't call this "going to ___." "Going to ___" is changing (flow) an investment portfolio (stock). Switching financial investments is a change in portfolio composition. It's an financial investment decision.

Financial investors and portfolio managers think in terms of increasing stock over time in order to increase wealth, while traders think flow, moving quickly to snipe at the margin to increase income.

"Going to ___" is buying to hold, which traders never do with their trading capital (if they have any brains anyway). Trading capital is working capital and financial investment is financial capital (savings). Keeping the two straight is essential, such as only trading with discretionary capital.

The marginal price is set by traders, but this is supported by portfolio choices. Changes happen very quickly in trading but more slowly in portfolio shifting.

As you say, price change is based to a significant degree on market reflexivity. At the margin this is momo driven and technical in nature as traders jockey for position.

Traders move markets in the short run at the margin, but don't move markets markedly in the intermediate and long term. This is the result of portfolio shifting involving changes is large positions.

Portfolio shifting of large position cannot be accomplished quickly, so portfolio managers do attempt to hit at the margin as do traders. They attempt to move gradually with accumulation and distribution phases so as not disrupt markets, as would happen if they purchased or sold very large positions in a short period.

Technical traders know this, too, and also attempt to determine accumulation (bulls winning) from distribution phases (bears winning).

So I view the action of traders as marginal and the action of financial investors as core. Price is determined at the margin and it is supported by the core. As price shifts at the margin wrt established trend (50 day, 100 day, 200 day moving average), indifference level shifts at the core and financial managers make their moves technically, although they also pay attention to fundamentals much more than traders, who are chiefly interested in momentum.

There are a lot of people who don't make these distinctions clearly, don't pay attention to cognitive-emotional biases, etc., and they become part of the 90% of losers who feed the market.

Leverage said...

Tom very good post, but if you examine volatility specially in these markets you will see is dominated by pure speculative activity and traders.

Banks are trading, a lot of their income comes from pure trading nowadays and eating the small fish (the feed chain goes from retail, and retail related vehicles like mutual/pension funds) -> funds -> banks).

This has come worse and worse within the last decade but nowadays is just out of hands as a market that is liquidity-driven we a lot of algorithmic action and hands-off trading. hence the high volatility and low participation/volume (portfolio managers stay aside and the appetite for risk is lower).

The dynamic is destructive as it scares away a lot of investors (hence the fly to quality or secure income, fixed income is preferred as it's easier to protect your principal).

With gold and what is worse, other commodities which have a real effect on production & consumption like oil the market is driven by traders in a wide price range or channel (around 75-120 USD for WTI oil), this is a wild range and there is a lot of potential for profit for firms (the ones which play it right off course).

So while your post is completely right we have to see the magnitudes of such moves and in which time frames happen. I agree the gold for example is in a secular bull market since years ago (also bought around 2000 to stock) specially as the demand from developing nations central banks continues to rise, but there are huge moves in pries of 20-30% in short periods of time, and that induced volatility affects prices too.

Financial bubblenomics I guess for the extraction of wealth.

mike norman said...

I'm bearish on gold the same way Warren Buffet was "bearish" on dot-com stocks back in the 90s. I just don't understand it. I bought gold in 2001 at $265 per ounce and probably held it to about $500. Since then I have been out--not selling--just out. What's the big deal?

Tom Hickey said...

@ Leverage

Right, now it is HFT and prop trading by the supposed market makers like GS. It's BS, really.

The Economic Maverick said...

Congrats to MMT and the Post Keynesians! It's been a great ride, and I'm glad to call myself a fairly recent supporter, for whatever it's worth from a non-economist like me ! This is only the early stages of going into the mainstream, and there is no guarantee it will get there. In fact, I think at some point we'll probably start to see a huge pushback, coming not just from U Chicago Monetarists, but from Paul Samuelson type "Centrist" and even "Center-left" style "Keynesian" as well, much like it was John Hicks and Paul S that stripped down the original Keynes and emasculated it. Let's hope the Abba Lerners, Wayne Goodleys and Joan Robinsons of the current generation (Wray, Mosler, Mitchell, Aureback, Hudson, Kelton Yves Smith, Mike Norman, Tom Hickey!) have more success this time around in the battle of ideas! I'm here to help, in whatever way I can