Technology Select Sector SPDR (XLK)
ProShares UltraShort Euro (EUO)
The Governor and Company of The Bank of Ireland (IRE)
ProShares UltraShort FTSE/Xinhua China (FXP)
ProShares Short MSCI Emerging Markets (EUM)
PowerShares DB Commodity Short ETN (DDP)
CurrencyShares British Pound Sterling Tr (FXB)
This past weekend, I met with several top University of Chicago professors, as the illustrious university’s alumni gathered to celebrate the recent fifth-year anniversary of their London business school campus. As the intellectual haven to Austrian School economist Friedrich Hayek and monetarist Milton Friedman, Chicago has a “free-market” reputation. The Chicagoans were gracious hosts. After my relentless peppering of the professors with politely punchy questions, the dean even singled out one of our heated exchanges as a terrific example of “Chicago-style” debate. I didn’t want to embarrass him by pointing out that I wasn’t even an alumnus.
The business school’s famous “Business Forecast Luncheon” pitted some of the top University of Chicago-educated brains against each other as they locked horns on forecasting the outlook for the U.S. economy.
By dissecting the constituents of the United States’ 2.9% gross domestic product (GDP) growth rate in 2010, the panel provided insight into the fragility of the current U.S. economic recovery.
For all of the handwringing about government spending, the hard data show that there has been no real net Keynesian stimulus in the U.S. economy at all. The increase in federal government spending barely made up for a huge drop in spending by state and municipal governments. Consumption rose, but only slightly. Net exports have been negative, as imports have soared. It turns out almost all GDP growth in 2010 was due to investment, specifically, inventory accumulation. Overhang in housing means that residential construction is a crucial element missing from this recovery. The only genuine new investment in the U.S. economy has been in technology and software, which grew at 15%. That probably accounts for Nasdaq’s strong performance this year.
The panelists were unanimous in predicting a muddle through for the U.S. economy in 2010. All were bearish on the prospects of the euro-zone remaining intact over the next few years. Greece is hopeless. Surprisingly, Ireland has a good chance of making it. John Huizenga also predicted a weak U.K. pound sterling, as fiscal austerity hit the U.K. economy. The head of Deutsche Bank research, a not-so-closet advocate of Austrian economics, highlighted the “mal-investment” taking place, thanks to a Ben Bernanke-blown asset bubble, and he predicted a collapse of emerging markets, commodities and the China bubble, a year or two down the road.
The best trades based on the predictions of the illustrious panel? Go long on the technology sector in the United States — Technology Select Sector SPDR (XLK). Bet against the euro — ProShares UltraShort Euro (EUO). Take a flier on The Governor and Company of The Bank of Ireland (IRE) — up more than 50% in just the last week. Short the pound sterling by selling the CurrencyShares British Pound Sterling Tr (FXB). At some point over the next year or two years, short China through ProShares UltraShort FTSE/Xinhua China (FXP) and the emerging markets through ProShares Short MSCI Emerging Markets (EUM).
Ivory Tower Meets the Real World: “The Power of Nudging”
The ideas hatched at the University of Chicago are making their impact felt in a significant way through the work of behavioral economists Richard Thaler and law professor Cass Sunstein (now defected to Harvard University), authors of “Nudge: Improving Decisions About Health, Wealth, and Happiness.”
The pair are the fathers of a newly-hatched theory about “libertarian paternalism” — an intentionally controversial name used to describe the insights of behavioral economics to influence people’s behavior. Whatever the name, what was “Ivory-Tower” thinking a few years ago is now real-world stuff. Cass Sunstein is now the Obama Administration’s regulatory czar, appearing regularly on the Glenn Beck program’s socialist “Gallery of Rogues.” The irony is that Thaler is helping David Cameron’s new conservative U.K. government establish a “nudge unit.”
“Nudging” is all the rage, both on the left and the right of the political spectrum…
Behavioral economics’ great insight is that we humans don’t make our decisions rationally. That’s something that advertising guru David Ogilvy could have told you 60 years ago. Although Thaler would never put it this way, “nudging” takes the principles of advertising — a catchy name, good product positioning, and “wordsmith-ing” copy to maximize consumer response — but applies it to the objectives of “higher-level” public policy. Instead of trying to sell you, say, a certain brand of deodorant, enlightened “nudging” encourages you to eat healthy foods, to pay your bills on time and to invest your retirement account sensibly.
Although we’re quite used to being manipulated by large corporations to buy one brand of detergent over another, using a “bag of tricks” — those are Thaler’s own words — to get people to make the right choices about other aspects of their lives is somehow more troublesome.
First, it’s hard to admit to yourself that you are unable to make your own right choices. But it’s even harder to accept that a government official has framed a question or a situation so that you will make the “right choice,” thinking it’s really your own free will. I am convinced 99%… as is yours, by the way. But even if I am a non-thinking automaton, is it Thaler’s job to play parent and guide me in the right direction? And, by the way, isn’t there a slight chance that Thaler himself might suffer from the same irrationality as you and I do. And if he doesn’t, couldn’t he just sell us the “cure” and be done with it? No “nudging” necessary…
The tenor of our discussion reminded me of Plato’s concept of the “noble lie.” In Plato’s “Republic,” it was OK for the “people of gold” (that’s Thaler) to lie to people of bronze (that’s you and me) — as long as it’s good for us.
Of course, what’s “good” is different in ancient Athens or, say, 1930s Germany. Put another way, if Thaler were consulting with the Taliban’s newly established “nudge” unit rather than with the U.K. Prime Minister David Cameron in London, “nudging” unlikely would be about where to place the fruit bowl in the cafeteria line. The serious point is that “nudging” beyond putting up a traffic light or two, or the placement of fruit bowls, presumes a universality of values that does not exist.
I then asked Thaler about the “unintended consequences” of his nudges. He gave me a pat Chicago answer about the necessity of looking at the “evidence” and focusing on things that work. That answer, as I’m sure Thaler recognizes, begs the question. The reason consequences are “unintended” is that the “evidence” you see today is, by definition, incomplete. Just look at the dozens of examples of well-intentioned environmental policies that ended up as a disaster. Drop a new fish in a lake to hunt down a nasty predator and, within two years, you’ve upset the ecological balance, and the entire lake is wiped out.
Yes, nudging works for, say, painting warning signs on streets to “look left” or “look right” to help tourists in London. But, as always, the question is where you draw the line. Somehow applying Justice Potter Stewart’s famous definition of pornography, “I know it when I see it,” is just not very satisfying.
My own perspective is that Thaler is yet another example of well-intentionedAmerican naiveté. Nasty people seem remote when you spend your life thinking big thoughts with a faculty of six Nobel Prize winners on the shores of Lake Michigan. But ignorance of them does not mean they don’t exist. And before we get overly impressed with our highly educated selves, I would remind Thaler of the work of psychologist Philip Zimbardo in the “Stanford Prison Experiment” to highlight how uncomfortably close we all are to acting like nasty concentration camp guards as soon as someone puts us in a position of authority.
If you want a sense of this, the next time you’re at the airport, go ahead and resist the “nudges” of a uniformed Transportation Security Administration employee and see what happens…
Agree or disagree, I am thankful for the intelligence and openness of “Chicago-style” debate. It is one of the most remarkable and enduring achievements of our Western civilization.