Austrian Economists on State of the Investment Industry

November 16, 2014 12:53 UTC

The Dollar Vigilante, and Austrian Economics based journal that promotes individual financial empowerment rather than dependence on the government’s financial system, has released an article arguing that Keynesian based advisory firms are putting people into the “worst possible investments.” According to TDV, these Keynesian advisers and fund managers are purchasing 10 year US Treasury bonds at 2.3% when actual (real) monetary inflation is near 10%, thus resulting in almost complete loss of buying power during the duration of the bond.

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In addition to this, the firms also still call the Treasury bonds “risk-free when what they really are is return-free risk”. TDV recommends that people manage their own funds given they have the time, ability, and skill. Digital currencies such as Bitcoin empower individuals to be in charge of their own finances and investments completely, though there could be higher risk associated. Christopher Casey, of the WindRock Wealth Management firm, participated in an interview on TDV explaining how his firm utilized Austrian economics in their company saying:

As far as I can tell, no other wealth advisory firm believes in and utilizes Austrian economics. We think it’s vitally important in designing portfolios. Austrian economists, unlike the mainstream Keynesian economists, understand what truly causes inflation and recessions – the artificial expansion of the money supply by central banks. Since these are the two greatest threats to anyone’s investment portfolio, this understanding is critical. This is why other wealth advisory firms herded their clients right over the cliff with the crash in technology stocks and later with all equities in 2008. They could not foresee these events, along with the collapse in housing prices because they don’t comport to their flawed models and theories. As of now, it is only a matter of time before the US equity markets experience some significant declines.

By using Austrian economics, we have a time-tested tool to guide our decisions. I should make one more point about economics and other wealth management firms. As I said, many adhere to Keynesian economics – they basically parrot what the Federal Reserve and other mainstream organizations predict. And the Federal Reserve in particular has a horrific track record in this regard – having completely missed the 2008 recession, the housing crisis, and the collapse in tech stocks. But perhaps just as amazing, many wealth advisory firms have no view on the economy! I cannot tell you how many times I have asked a Chief Investment Officer of a major wealth advisory firms what causes recessions, and their response is either “we don’t know” or “we’re agnostic as to the economy” – whatever that means.

New Investment Ideology

While Keynesian and Austrian economists have very different ideals, Keynesian investment firms are much wider spread. The WindRock Wealth Management firm is unique in how it advises clients. Almost all large investment firms are based on Keynesian economic theories. Austrian economics has been very accurate in predicting economic recessions that have occurred over the years; Austrian economists believe that the artificial expansion of the money supply is the main factor that drives both inflation and economic recession.

Casey explains how Windrock Wealth Management incorporates Austrian economics into designing client’s portfolio:

Our clients’ risk profiles and liquidity needs are integrated with our projections of real economic growth and price levels over the next twelve months. We then combine this with our judgment as to overall asset valuations in the equity and debt markets to determine the allocation between stocks, bonds, and hard assets such as real estate and precious metals. After determining these broad allocations, those same assessments dictate the constituent parts of each allocation. For example, if we are in equities, how much is in emerging markets versus the developed world? How much is defensive versus aggressive, etc? One additional item I should note about portfolio construction, we do not believe in “putting all of your chips on red” and waiting for the big payoff. By that I mean we select investments we expect to do very well when the economy plays out the way we expect, but they will also do well in the interim due to the compelling risk and return profile the investment itself offers. As an example, we believe multi-family rental real estate will do quite well in the US when a housing decline unfolds due to rising interest rates. The multi-family rental real estate vehicle we utilize is projected to almost double a client’s money in three years – even without a housing market decline. We did not go out and buy a publicly traded rental real estate vehicle (they are currently overvalued) which may do well in a housing decline – we found an investment which will do well regardless since it is building a new type of multi-family housing community.

While Keynesian investment firms are plentiful, Windrock Wealth Management stands alone as being the only large Austrian economics investment firm. Christopher Casey believes that the state of the investment industry is currently very poor and will ultimately harm clients. Purchasing a 10 year US Treasury bond at 2.3% when real monetary inflation is near 10% is not beneficial for anyone, though many investment firms are still marketing these bonds as a risk-free return.

What do you think about the state of the investment industry? Comment below!

Source: The Dollar Vigilante.

Images via Shutterstock.

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