The vast majority of investment advisors base their analysis on a Keynesian or a Monetarist economic framework and invest their clients’ money accordingly.
Why is this important? Gross Domestic Product (GDP), the most common measure of how an economy is doing, is based on final consumption and excludes intermediate goods which are major components of final consumer goods. Mainstream economists see consumer spending as the engine of economic growth, rather than being a consequence of higher production. Most financial analysts view higher consumer spending as the “driving” force behind economic growth and prosperity. Think about it. When someone drives an expensive car, is it because of his higher income or is it because of his car that he is wealthy? It is because of his income that he is able to afford that car. Many mistake the effects of higher income with wealth. Individuals today are not richer than someone who lived two-hundred years ago because of hyper-spending. They are wealthy because of their ability to save, their level of savings, and the amount of capital available to them.
Why is capital important?
Let’s say somebody needs to dig a hole. One man is digging a hole with his bare hands. What can make his job easier, more productive, and more enjoyable? Capital. In this example capital might take the form of, say, a shovel or a complex excavating machine. It creates an extraordinary boost.
On the other hand, Keynesians and Monetarists, see capital as a self-sustaining unlimited fund that does not need to be replenished, preserved or well invested. This view is a major flaw, among the many, of these schools of thought. More savings today translates into more capital tomorrow and, therefore, increased future production and wealth.
Mainstream economists think that education and technology are the biggest contributors to long-term economic growth. Although important, capital bridges the gap between an abstract idea and a tangible product or item. People all over the world every day dream of new technology advances and it is capital that makes these blackboard ideas reality.
Our organization views savings and production as the engine of economic growth, as opposed to the deeply flawed idea that consumption and debt spur sustainable growth. Capital is what makes rich countries richer and the lack thereof is what makes poor countries poorer. Therefore, we recommend investments according to our view.
Our view
Our long-term investment prospects are deeply rooted in the Austrian School of Economics. Countries that save and invest grow wealthier while countries that squander and de-capitalize become poorer.
In a free economy, that is, an economy without a central bank, people can preserve wealth and save through money or bonds. In an economy with a central bank, where constant depreciation of the currency is a fact of life, money loses its function as a store of wealth. In this kind of environment, investment becomes a necessity. People often have to choose to invest in stocks or real estate, for example.
Lastly, in an economy with rapid increases in the money supply, people have to move into an asset class that produces no cash flow, just capital appreciation, and that asset class is commodities.
Moreover, commodities and equities tend to run in cycles counter to each other. The current commodities bull market started in 1998-2000 while the last bull market in US equities started in 1982 and ended in 2000. The Dow Jones Index closed at an all time high in inflation adjusted dollars at 12,000 in March 2000.
Understanding the business cycle will make you a better investor. Not only will you be able to spot long-term trends, but you will also be able to avoid bad investments.
Stay tuned for next week’s post where we’ll discuss commodities and equities cycles.
Alfonso
Jared
