how the system really works?

[yusuf]

hey all

I read a book a called the alpha strategy, pdf download free is

http://www.biorationalinstitute.com/zcontent/alpha_strategy.pdf

Interesting construct and way of thinking. DOn;t really agree with about half of what he says, but the information on regylated banking etc are qite illuminating. Anyone familiar with this work and if it is valid in economic theory terms?

peace

yusuf

[Teazer]

Here ya go. I flipped through it pretty quick & got the high points.

yes,empirically, individual investors often do very badly in markets unless they invest very infrequently and conservatively for a number of reasons.
His definitions and discussions on wealth are highly dodgy and extending Robinson Crusoe models to real life conclusions runs into some complexities.
Price & relative value is fine, economics-wise.
Asymmetric information issues tend to show up quickly and can outweigh the effects of these basic models.

p.11
"I assume that you probably answered yes to most of the questions. If you did, you are in agreement with most of the economists, politicians and financial experts in the world."
I would hope most economists would have said #7 only (too much money), or maybe #5 scarcity for some commodities depending on what it is. It's very straight forward. Other ones have indeterminate effects or just redistribute money.
Then again - any one who says they are an economist are by definition an economist.
His description of inflation is a standard classical approach, but really doesn't do justice to some of the details. He gives the impression prices will stabilize much quicker and more costlessly than they really do.

The gold debasement & who benefits on p.16 is iffy because it assumes the person selling to the king doesn't know what's going on & has no bargaining power. Actually that's been pretty well covered since the Expectations Philips curve debates back in the 70's.
The old 'bankers making money for themselves out of thin air' doesn't do justice to what happens. Unlike any other firm or company, banks can't just offer an IOU to someone, without keeping some reserves to back it up. Whether Fed Reserve regulation has required enough be retained in the past for adequate risk prevention is a good question & depends on how much they trust the banks to make decent loans for good investment purposes, allowing the economy to grow and everyone be better off (or too much and having lots of defaults etc as we've seen!). The book's model also omits the risk which is part of the cost of issuing such loans.
Given the current system, runs on the bank really don't happen to any great extent due to the Fed and FDIC standing behind most account holders. The article makes bank runs out to be a good thing, constraining bad bankers. In practice it was not a pleasant thing at all and the individual account owners were the ones losing the most.
p.17 People can write IOU's for however much they want, just not checks which are drawn on bank accounts. By lending long term, banks provide a service which is very important and otherwise would make a lot of investment not happen easily or cheaply. In the process they take on some risk.
The p.19 information about the Fed is outdated. You can look for more accurate info on wikipedia. The whole bit about the monetizing debt again misses much of the detail that makes the system work. Keep in perspective, that what the book is suggesting would lead to the mad levels of hyperinflation in other parts of the world and history. Since that doesn't happen here, a conclusion could be drawn that their description is incomplete.
The book then goes on to conflate deficits with monetary policy.
Chapter 4 should be 'unexpected inflation' rather than inflation. If the inflation level is predictable, then by their own earlier argument it would have no effect on resource allocation. There were business cycles even throughout the gold standard period.
p.27
"Only a tiny handful of economists, mostly unnoticed, have used the correct argument against controls:they cannot possibly work, no matter how they are administered, because the individual prices at which people sell their products have nothing to do with inflation."
Maybe he's talking to the wrong people. Price controls don't work because people resort to more costly methods to get to an equilibrium demand and supply state. Price allocation is at least cheap to run. Ditto for all the other laws, subsidies & stuff they mention.
Ch. 5 - regulation - not my field of expertise & none of it is recommended by standard economic theory, and hasn't been for going on for a century. Certainly changes in regulation lead to some of the largest reallocations of wealth, so its big business. Hence, monitoring of government by concerned, educated voters is a good thing.
ch.6
Figure 2 picks a particularly unpleasant period suspiciously!
The most common strategy is wide diversification into stocks, bonds, commodities etc. Relying on fundamental or technical analysis just gets most people into trouble and high trading costs, so the rest of their commentary in that chapter isn't worth discussing.
ch7 "the Solution"
Invest in eg education - depending on how much return you get on that, sure. An extra expensive piece of paper certificate on your wall won't help much particularly if it takes years to get.
Invest in hard assets - usually have very low, or negative returns unless WW3 breaks out, in which case anyone with a bigger gun will take them from you. As they mention, stockpiling future consumables ignores increases in technology that make some things cheaper over time, plus just ties up your cash which could be better spent on crack & hookers, or something with a return higher than the rate of inflation and a bit more liquid while taking less space. Keep enough for a short time, but after that head for the countryside.
The bit against shortages/price controls is a bit incomplete since as far as efficiency goes, it is based on the assumption of somewhat unfettered access to wealth, loans etc. There are times when allocation by price, while efficient is also not likely to be a good way of doing it. Sometimes shortages are the price paid for a 'fair' system, which again is something not valued in most applications of economic theory, but is there since everything is based originally in 'utility' rather than 'wealth' terms.
ch.8 Hey that sounds familiar. Could've been me several topics ago!
For most people the costs of all that storage outweigh the benefits. Depending on you & how much space you have, it might be different.
"Save real money"
All the stuff recommended is very illiquid. Good luck paying your hospital bills, tax payments etc if you have to sell off all those assets. Buying stuff like that is one of many ways of diversifying. Don't do it to excess & don't do it if it's overly costly in some way.
Gold etc is another thing to diversify with. Holding it increases your risk of theft however.
The determining production costs p.91 is about right - like with any investment asset, knowing its true value if different from that of the market price is very unlikely and usually includes some risk you hadn't thought of.
The thing about not speculating p.92 is worth noting. For any particular asset, there are very few people that know better than the market how much it's worth. I would go further and say in any of these markets mentioned, don't buy individual assets - get an etf or index fund of stocks, metals etc. It's cheaper, well diversified & more liquid.

[Kato]

[Michael]

Why is the audience laughing at Carlin? They think he's exaggerating, or sompin'? Nice clip, tho', thanks.