May 2, 2015

Weekly Picks from the Web: May 2

By In Blogs

I was doing something like this on a daily basis, but didn’t have the time to keep up. I really like the idea though so I think I’ll move it to my favorite pieces from the week, and publish it every Friday or Saturday.

Theological and Philosophical

-Samuel Renihan was on the Reformed Forum discussing his new book, a reader, entitled “God without Passions.” This book collects several historical passages and commentaries from throughout Reformed history on the topic of Divine Impassibility. As the Confessions say, “God is without body, parts, or passions.” What is meant here by passions? I highly recommend the book and the interview as well.

-Steven Lawson writes on the necessity of preaching the doctrine of God’s wrath, even though the topic doesn’t fit well in today’s culture and society. He writes:

Every preacher must declare the wrath of God or marginalize His holiness, love, and righteousness. Because God is holy, He is separated from all sin and utterly opposed to every sinner. Because God is love, He delights in purity and must, of necessity, hate all that is unholy. Because God is righteous, He must punish the sin that violates His holiness.

Political and Economic

-Pater Tenebrarum writes on the recent GDP results and explains in a helpful way why the GDP is a useless number, as are all “aggregate statistics” about the economy.  He writes:

Moreover, “GDP growth” is really not informative with respect to whether or not the activity measured is profitable and therefore indicating that wealth is created. Given that government consumption is a major component of GDP, there is obviously a lot of wasteful spending that is counted as “growth”.

Furthermore, in a bubble era, when credit expansion ex nihilo is running wild, a lot of investment in fixed assets will eventually be discovered to have been malinvestment. Such spending is also added to “growth” while it occurs, but in reality, it is just a waste of scarce capital. Simply put, there isn’t much worth measuring, because the truly important things cannot really be measured anyway. Even so, it makes a lot more sense to occasionally look at the gross output tables per industry rather than GDP.

-John Hussman’s weekly comment (from April 13) discussed the difference between Valuation and Speculation when it comes to our approach to investing, especially in the stock market.  For anyone who is aware of the major players in the investing world, Hussman is sort of controversial. He is the poster child for contrarian investors; and while this played out quite incredibly during the 2008 downturn, it has proven to be a struggle during the following six years of the Fed’s monetary absurdities.  He writes:

The first is what I’ve often called the Iron Law of Valuation: every security is a claim on an expected stream of future cash flows, and given that expected stream of future cash flows, the current price of the security moves opposite to the expected future return on that security. The higher the price an investor pays for that expected stream of cash flows today, the lower the return that an investor should expect over the long-term. Particularly at market peaks, investors seem to believe that regardless of the extent of the preceding advance, future returns remain entirely unaffected. The repeated eagerness of investors to extrapolate returns and ignore the Iron Law of Valuation has been the source of the deepest losses in history (see Margins, Multiples, and the Iron Law of Valuation).

The second consideration, however, is equally important over any horizon other than the long-term. It deserves its own name, and I’ll call it the Iron Law of Speculation: The near-term outcome of speculative, overvalued markets is conditional on investor preferences toward risk-seeking or risk-aversion, and those preferences can be largely inferred from observable market internals and credit spreads. In the long-term, investment outcomes are chiefly defined by valuations, but over the shorter-term, the difference between an overvalued market that becomes more overvalued, and an overvalued market that crashes, has little to do with the level of valuation and everything to do with investor risk preferences (see A Better Lesson than “This Time is Different”).

-Richard Ebeling wrote an essay in response to some comments over at the Wall Street Journal in which the WSJ complained that the world was suffering from a “global glut” (excess goods) problem that could only be solved with an increase in demand. This is Keynesianism 101, wherein the central bank needs to pursue a policy on increase availability of monetary demand so that the consumers can “soak up” the excess goods.  Ebeling challenges this narrative and gives the proper source of the problem, which is the Federal Reserves expansion of the money supply which let to the misallocation of resources. Ebeling writes:

The apparent “gluts” of commodities, capital and labor that the Wall Street Journal reporters see hanging over the global markets and which they forlornly wish governments could “cure” through more deficit spending are, in fact, the relative imbalances, distortions, and misdirection of capital and labor brought about by years, if not decades, of government fiscal, monetary and interventionist policies that have created many of the problems we now face.

They are the residues of housing booms and investment bubbles caused by earlier interest rate manipulations and money creation that artificially misdirected capital, labor and resources into unsustainable activities, given consumers and savers real preferences to demand various goods and save portions of their incomes as the basis for sustainable investment patterns.