Friday, April 20, 2012

Politico Does Its Part to Prop Up the Falsehood that Keynes was a Great Investor

Politico is running a piece by Nicholas Wapshott, author of Keynes Hayek: The Clash That Defined Modern Economics.

In the piece, Wapshott continues to promote the absurd view that Keynes was a great investor. He writes:
Keynesianism has proved so powerful and enduring that Keynes is regularly portrayed by conservatives and libertarians as someone who hated the free market and market forces.
The truth is quite the opposite. Keynes knew how to play the market better than almost anyone else, living or dead... 
Now two British economists, David Chambers and Elroy Dimson, have published a new study of Keynes’s investing methods and concluded that the founder of macroeconomics, so often painted as a crypto-communist by his opponents today, was brilliantly innovative when it came to making money in the stock market.
Puhleez. As I have written before about the anti-semetic, pedophile:
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...

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.

In the Politico article, Wapshott also takes a vicious swipe at Friedrich Hayek:

Hayek was so inept at managing money that, notwithstanding the fact that his master work “The Road to Serfdom” was an international best-seller — as it remains today — he was obliged in old age to move from Chicago to Freiburg, Germany, to continue using the books in his library, which he had been forced to sell to the university there to support his final years. 
It is a painful paradox in the story of Keynes’s rivalry with Hayek that few free-market economists ever care to explain.
Well, let me explain it here. Hayek was a scholar, not a hedge fund manager and certainly not a manipulator of political leaders for personal gain. His entire career was spent in scholarly pursuit, despite the many obstacles put in front of him. When he attempted to get a position on the economics department faculty at the University of Chicago that was blocked by the economics department itself. A position was finally found for him at the University of Chicago in the Committee on Social Thought. When he applied for retirement pay from the University of Chicago, it was denied him on the technical grounds that he was not officially part of the University of Chicago. 

Yet, the same University of Chicago that denied him entry onto the economics department and denied him  retirement pay, now proudly has his picture posted at the Gleacher Center as a "University of Chicago Nobel Prize Winner". An award specifically given to Hayek for his work in economics!

Part of the Gleacher Center "University of Chicago Nobel Prize Laureates" wall.  Hayek's picture  is  in the  lower row, in the middle. It is displayed at the University of Chicago despite the fact that Hayek received the award for his work in economics and Hayek was denied approval to join the University of Chicago economics department faculty.

I consider it a badge of honor, in this day and age when a beltarian can be bought for a ham sandwich, if it comes with Grey Poupon mustard, that Hayek sold his books rather than take some position that would have resulted in his being co-opted. Never mind Hayek going anywhere close to the Keynes method of manipulating government leaders for personal profit.


  1. The news is replete with examples of tawdry human behaviour. I find it a sad indictment on academia that a man of undoubted intellect and integrity as Frederick Hayek was treated so appallingly by the University of Chicago and then 'claimed' when he won his rightful acclaim. The university should be outed for its hypocrisy.

    Even in some Mises circles today Hayek is considered a 'wet' libertarian. He was the only one challenging Keynes when nearly every other economist of their times was venerating the General Theory.

  2. The Politico piece should be discounted on this quote alone:
    'Hayek was so inept at managing money that, notwithstanding the fact that his master work “The Road to Serfdom” was an international best-seller — as it remains today — he was obliged in old age to move from Chicago to Freiburg, Germany, to continue using the books in his library, which he had been forced to sell to the university there to support his final years.' it displays the author's inability (which suggests ignorance) to distinguish between a scholar (Hayek the economist) vs. an entrepreneur (the Hayek that wasn't) vs. a crony capitalist (Keynes).

    Being a good economist has nothing to do with being a good businessman and vice-versa.

  3. I don't understand why mining stocks would be a good bet when the monetary demand for gold was about to collapse due to its demonetization for the American public. Can someone explain what I'm missing?

    1. FDR and the government controlled the supply in the US and therefore could manipulate the price.

      The supply of reserves was restricted by taking it off the open market, which made the price go up.

      Demonetization does not necessarily diminish demand, but confiscation does diminish supply on the market. Again, if demand is constant and supply is restricted, the price will go up.

  4. This is what makes it all the more suspicious surrounding the gold stock buying of Keynes and Baruch.The only reason the stocks went up was because after FDR confiscated everyone's gold (to prevent selling into the open market), he ordered the Treasury to buy gold and pushed the price up. Only someone that knew FDR was going to prop up the price of gold would have bought gold mining stocks at that time.

  5. I dug around, here's the best I could come up with:

    Basically, gold prices in 1933 were now fixed (and guaranteed payable when sold to the U.S. Gov't) while mining/production/labor costs fell off in a deteriorating economy. Thus intervention, doing what it does, resulted in an unnatural profit increase for miners. Commodities and other sectors operating in the real market (with prices NOT arbitrarily set by FDR from his bed) couldn't hope to compete.

    Am I close? Someone with a greater command of the subject feel free to augment. Cheers!

  6. You are correct. Many in the deflation camp has argued to buy gold stocks after 2008 for this reason. In deflation gold price stays high or go up, while production costs go down. They were citing the 30's.

    They always forget to mention FDR's confiscation and price setting. And of course, they missed BB's printing after 2008.

  7. This just in: elitist soothsayers of crony-capitalist regime cash in from their connections. Sports and weather to follow...

  8. Thanks for taking apart the Politico nonsense, Wenzel. By extension of politico's logic, does that make Ron Paul the best politician of today since he vastly has outperformed everyone else in DC with his investments? For some reason, I don't think the logic applies there.