Saturday, March 31, 2012

The Super Myth of Keynes as a Great Stock Market Investor

WSJ is running a story today perpetuating the super myth that John Maynard Keynes was a great investor. Writes WSJ:
A new analysis of the investment performance of John Maynard Keynes proves that the famous economist also was one of the greatest investors of the past century.
Total BS.

What's remarkable is that WSJ provides the facts surrounding what really went down with Keynes.

Since Keynes had a wacky theory of  what caused the business cycle, he lost big in the 1929 stock market crash (Despite the fact that an investment fund he took public was specifically created to profit from the "credit cycle theory of investment. p.20). He had losses in the portfolios he managed, in the second half of 1929 and for the full years 1930 and 1932. From WSJ:
Keynes wasn't a very good macro manager. He lagged behind the British stock market miserably until 1928, and he had 83% of his primary portfolio in stocks going into the fall of 1929. 
"It's hard to time the markets," Mr. Chambers says. "Keynes struggled with it, and then he missed the 1929 crash—even with an unrivaled network of information sources."
He was 83% long going into the downturn that resulted in the 1929 crash (p. 21)So how could Keynes be a great investor with such a bad performance? Because Keynes, the evil bastard, along with Bernard Baruch, talked FDR into confiscating the gold owned by all Americans. He then loaded up his portfolio with gold mining stocks and then urged FDR to prop up the price of gold.

Here's WSJ on where he made his profits:
 Keynes also made titanic bets on industries he thought were cheap; by 1936, he had 66% of his portfolio in mining stocks and not a farthing in bank or energy shares.
Actually, it was earlier, in 1933, that Keynes had bought most of his gold stocks, but you get the picture. The man was loaded up in gold stocks. What's so big about 1933? FDR confiscated American gold in 1933.

 On April 5, 1933, at the urging of Keynes and Baruch, Roosevelt ordered all gold coins and gold certificates in denominations of more than $100 turned in for other money. It required all persons to deliver all gold coin, gold bullion and gold certificates owned by them to the Federal Reserve by May 1 for the set price of $20.67 per ounce. By May 10, the government had taken in $300 million of gold coin and $470 million of gold certificates. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed.

Keynes then wrote an open letter to FDR in late 1933 calling for him to enter the gold markets to "stabilize" the price. The letter was published in the New York Times. In fact, this was just backup support for FDR, he had already started doing what Keynes proposed in the letter. FDR operative Jerry Jones explains:
During a train Journey from Atlanta to Washington early in his administration, President Roosevelt talked with me about devaluing the dollar. He asked who would get the profit on the gold in such an operation. I told the President I did not know, but would look into it.

During the next few months the matter was discussed generally between the Treasury, the Department of Justice, and the RFC. It was finally decided by lawyers that the RFC had authority to buy newly minted domestic gold or any foreign gold as a commodity, giving its notes in payment for the gold at whatever price might be determined by the RFC. The Presidents idea was that one way to lift the depressed prices of commodities would be to devalue the dollar by raising the price of gold.

A movement by the government to collect hoarded gold from the public had begun the previous March during the nation-wide bank holiday. Congress on March 9 had given the President dictatorial power over all forms of money. The total of gold coin and gold certificates in circulation on the day the President was inaugurated was $1,385,000,000. Two days later, on March 6, banks were prohibited by Presidential proclamation from any further paying out of gold coin and gold certificates. On March 8 the Federal Reserve Board requested the Federal Reserve banks to furnish a list of persons who had recently withdrawn gold and gold certificates, and who, by the approaching March 27, did not redeposit them. Between March 4 and March 31, $260,000,000 in gold coin and $370,000,000 in gold certificates were returned to the Federal Reserve banks and the Treasury. On March 31 the total of gold coin and gold certificates outside the Treasury and the Federal Reserve Banks was $700,000,000, the lowest figure since 1923.

On April 5, my birthday, the President issued an Executive Order forbidding the hoarding of gold coin, gold bullion, and gold certificates. In mid-April he put a ban on exports of gold, and in June he signed an Act of Congress which outlawed the gold-payment clause in all moneys and other public and private contracts. By then some people in Wall Street were really getting the jitters and howling calamity.

On October 16, 1933 I sent to the President the following letter:

My Dear Mr. President: 
In considering further the problem of the purchase of newly mined gold, I wish to make the following suggestion. 
Under Section 9 of the RFC Act this corporation is authorized, with the approval of the Secretary of the Treasury, to offer for sale “at such price or prices as the Corporation may determine with the approval of the Secretary of the Treasury,” its obligations. We have authority to issue large amounts of notes, debentures or bonds. They could be offered by us for newly mined gold only or for gold coin, and we could agree with the holders of newly mined gold to accept bullion. 
You and the secretary could give us authority to sell this gold abroad. It need not be used but it would afford us a market should it be necessary, and thus would not result in a determined loss to this Corporation. 
When Congress meets legislation could be passed which would authorize the purchase of this gold from us or we could pay our indebtedness to the Treasury with it, either on the dollar basis or on the gold basis as might be thought best. 
You might desire to submit this suggestion to the Attorney General.
Very sincerely yours,
Jesse H. Jones Chairman

Four days later, at the direction of the President and because of his action in outlawing the possession of monetary gold, the directors of the RFC adopted a resolution stating that there was no free market in the United States for newly minted domestic gold; that it would aid in the creation of such a market if such gold were purchased abroad; and that public problems arising from the absence of a free market for gold newly mined in the United States warranted action.

The board resolved that upon the Presidents request the RFC, subject to the Secretary of the Treasury’s approval, would authorize issue of $50,000,000 in short-term obligations to be offered for sale payable in newly mined domestic gold or imported from abroad.

A copy of this resolution was sent to the White House with the request that the President furnish us with a copy of the opinion of the Attorney General as to the legality of the proposed transaction. Two days later, on Sunday October 22, I prepared a letter setting forth the gold-buying plan as worked out by our general counsel and the Department of Justice and took it to a meeting which the president had called for two o’clock. I went a few minutes early to give the President an opportunity to read the letter before others he had invited arrived. The President hardly finished reading the letter when the others, who included several members of the Cabinet came in. The meeting was in the Oval Room of the White House. No sooner had the men all assembled then the President proceeded to read aloud my letter. He stated that he proposed to devalue the dollar by increasing the price of gold.

The meeting was over in a few minutes. As we were leaving, the President turned to me and said: “Jess, you and Henry [Morgenthau] drop by my bedroom in the morning, and we’ll fix the price of gold.”

That night, in one of his “fireside chats” on the radio, he gave the public an inkling of what was to come. He reiterated that the “definite policy of the Government has been to restore commodity price levels.” He said that when these had been restored “we shall act to establish and maintain a dollar which will not change its purchasing and debt paying power during the succeeding generation.”

Then he said “It becomes increasingly important to develop and apply further measures which may be necessary from time to time to control the gold value of our own dollar at home.” And he added that “the United States must take firmly in its own hands the control of the gold value of our dollar.”

While the hair of many a conservative listener probably began to stand on end and his eyes to bulge, Mr. Roosevelt went on to announce the establishment of a government market for gold in the United States. He said he was authorizing the RFC to buy gold newly mined in the United States at prices to be determined from time to time after we had consulted with him and the Secretary of Treasury.

“Whenever necessary to the end in view,” he added, “we shall also buy or sell gold in the world market…Government credit will be maintained and a sound currency will accompany a rise in the American commodity price level.”

Thus he began to haul in the anchor to which the dollar had been tied for thirty-four years.

The next morning I went to the bedside of the President with Henry Morgenthau Jr., who was then Farm Credit Administrator. It was the President’s custom to have his breakfast in bed and to remain there a while reading the newspapers and some of his mail and memoranda of one sort or another before going to his office around 10 o’clock. At that first meeting I suggested to the President that, to keep speculators from figuring out what we were doing, we should not raise the price of gold on a formula, but should jump it around from day to day until the ultimate price was determined at which the dollar would be reestablished on a gold basis. We decided that morning the first day’s price would be $31.36 an ounce instead of the then parity of $29.01. We agreed that gradually from time to time we would boost the price, but with no indications as to how much-or what the ultimate price would be.

On October 24 the President announced publicly that he had named Mr. Morgenthau, Dean Acheson then Acting Secretary of the Treasury in the absence of Secretary Woodin, and me as committee to fix the price at which the RFC would buy gold newly mined in the United States. The next morning we announced that the price for that day would be $31.36–the figure hit upon earlier at the President’s bedside.

That same day the President issued an Executive Order authorizing the RFC to acquire and to hold, earmark for foreign account, export, or otherwise dispose of gold newly mined in the United States and received by the mints and assay offices on consignment for such purposes.

The RFC thereupon announced that it would receive subscriptions for its ninety-day notes payable in gold so received. The circular for such notes was issued on October 26. At the same time, we jacked our paying offer from the previous day’s starting price of $31.36 to $31.54.

We kept raising the price day after day, until we reached $34.01 on December 1. It remained at that figure through December 16, and then was moved up to $34.06, where we held it steady during the remainder of our gold-buying program, which was concluded January 17, 1934. By that time the RFC had bought 695,027.423 ounces of domestic gold for $23,363,754.56 and 3,418,993.045 ounces of foreign gold in the London and Paris markets for $111,037,195.78, a total of $134,400,950.34.

The average cost to us for the foreign gold had been $32.48 per ounce, and for the newly mined domestic gold, $33.62 per ounce.

At the start the RFC had decided to issue $50,000,000 of notes with which to buy gold. This was increased by our board a few weeks later to $100,000,000 and then to $150,000,000.. . .

Gradually, through the daily meetings of the President, Mr. Morgenthau, and me, the plan developed to fix the dollar at about 60 per cent of its old parity, which I am sure was the President’s idea. This was finally done at the end of January. During that month Congress passed the Gold Reserve Act of 1934, which the President approved on his fifty-second birthday, January 30. This act provided that all gold coin and gold bullion in every bank in the Federal Reserve System should pass to and be vested in the United States Treasury and be paid for in gold certificates. The act authorized the Secretary of the Treasury to buy gold and to sell gold, “which is required to be maintained as a reserve or security for currency issues by the United States, only to the extent necessary to maintain such currency at a parity with the gold dollar; and therefore, for the purpose of stabilizing the exchange value of the dollar … to deal in gold and foreign exchange.” For that purpose a stabilizing fund of $2,000,000,000 was put aside.

At the President’s request, the Act of May 12, 1933 – The Thomas Amendment to the Farm Relief Act- was amended by Congress to provide that the weight of gold in the dollar be fixed at not more than 60 per cent of its then weight. Authorization was also given to the President to reduce in his discretion the weight of the silver dollar in the same percentage. At 3:10 pm. on January 31, 1934, which was ten minutes after the New York Stock Exchange had closed for the day, President Roosevelt issued a proclamation fixing the weight of the gold dollar at 15 and 5/21 grains, 9/10 fine, to become effective immediately, [a price of $35 per ounce]. Thus the dollar was officially revalued at 59.06 per cent of the parity , which had been fixed for it in 1900.
As far as the Baruch side of the gold manipulation, in 2009 I spoke to investment advisor Martin Weiss about his father, Irving, who was part of the Baruch clique:
 Martin Weiss' father was one of the few people, perhaps the only one, who made money shorting stocks in 1929 and also 1987. Weiss' father was also a friend of Bernard Baruch. At FFI, I told Weiss that I suspected that Baruch (and Keynes) influenced FDR to prop up the gold price for personal gain. Weiss wasn't willing to go that far, and said we will probably never know what really happened. But, he told me that his father, and a few others, were hanging around with Baruch at the time, and that while Baruch never leaked any information to them, Martin's father and the others were all buying gold stocks aggressively and that Baruch was aware of this and, at a minimum, he certainly didn't do anything to discourage them.
Bottom line, as far as I'm concerned, Keynes was a terrible investor, as shown by his pre-gold mining stock losses. The only time he made real money in the markets was when he traded on inside information about FDR's plan to drive the gold price up, and loaded up on gold mining stocks. Got that? The man who called gold a "barbarous relic" in his 1924 book, Monetary Reform, had 66% of his portfolio in gold mining stocks  in the 1930s.


  1. Not much has changed over the years...

    People like Henry Blodget like to feed us the line that Krugman has been right!! Ha!

    Keynesianism rests of lies and deceit. And while they may be able to pull the wool over some people's eyes, against economic law they've scored a big goose egg.

  2. But Ron Paul who has invested heavily in gold mining stocks, physical gold and silver, and other instruments that are based on the economy getting worse - and doing phenomenally well at it - has a terrible portfolio and is a failure at investing.


    2. WSJ lying through their teeth as usual.

      skip to 1/3rd of the way down

    3. LOL - Ron Paul has probably the best performing portfolio of anyone in Congressional history, and that is without the benefit of insider trading that all of the crooks do.

      WSJ is full of it, as usual.

  3. Good to see the Wall Street Neo-Con Journal corrected.

  4. RW,

    Could you please provide the source(s) for this assertion:

    "Because Keynes, the evil bastard, along with Bernard Baruch, talked FDR into confiscating the gold owned by all Americans. He then loaded up his portfolio with gold mining stocks and then urged FDR to prop up the price of gold."

    A regular reader

  5. I could be an excellent gambler if I could force the house to self-bust all the time, as well.