Peter Thiel's latest on the markets

There's an interview with Peter Thiel on the Business Insider website in which he provides his outlook on the global economy. (I hate it when you can't embed a video.) Briefly, he expects deflation, dislikes equities and gold, and is okay with dollars and government bonds.

Thiel is at least a hundred times smarter than me, but I think he's wrong on gold. By inference, I believe he sees gold as a commodity, not as money. Sure, in an inflation, commodities do well, and in a deflation, they do poorly while money is your best bet. However, if gold is money, then in a deflation, it will do well.

I agree that the economic system is deflating: leverage is being wrung out of the system, credit is being destroyed, risk is being punished. In such an environment, money is king. But our government is hell-bent on destroying the dollar, and people will lose faith in dollars eventually. Where do you turn when your government-decreed money is being burned? Nature's money.

I've seen some of these austerity measures that countries like Greece are taking. I'm not impressed. By extension, I don't think there are any politically feasible austerity measures that will prevent either a true US default or a default-by-proxy (hyperinflation). To prevent these things, you'd have to do something like the following:

* Abolish Social Security, or at least, raise the age of benefits to, say, 75+
* Abolish government involvement in health care including Obamacare, Medicare, Medicaid, subsidized employee-provided insurance
* Abolish the current income tax and either institute a low rate flat tax (on income) or a fair tax (on consumption)

If those things happened, I could believe real austerity was being enacted. But I'm willing to bet that none of that is politically possible, and after this brief lull is over, the Euro nation crises will be in the news once again as these milqetoast austerity measures fail.

BTW, the funniest quote from the interview is:

The model of the US economy is that we are the country that does new things. But over the past few decades, that's changed. Now we have people that do crazy things, like weigh 600 pounds. We have to get back to being the country where people do things that are new.

Things to do:

1) Write Grand Unified Theory post on Inflation vs Deflation and how pretty much everyone is wrong.
2) Respond to nobody.really's post from a month ago.

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How stupid are Americans?

For 30 years personal finance writers have been advising us to tear up credit cards and keep 3 months pay in the bank for emergencies. The Great Depression made true believers out of my parent and most people who lived through it. It was their grandkids who screwed up and got greedy by buying toys and vacations on credit, buying houses with garages bigger than their grandparent's house. The stupidest of all are the union workers, holding down good jobs, knowing they may walk off the job every 3 years, and not keeping 3 months expenses in the bank.

If this generation has learned their lesson then retail sales can't pick up until the credit cards are paid off and half the families have a reserve in the bank. We'll see.

wow no mention of the war

wow no mention of the war costs at all in your austerity, just tell Americans they are on their own, those with money get health care, interesting

Punt on nobody.really's post

Hey, I'd be honored to have Jonathan Wilde's thoughts on any post of mine. That said, Jonathan is doing the actual work of posting NEW stuff. All else being equal, that's probably a better use of his time from everyone's perspective.

So sure, if you've got something you're itching to say, I'd be glad to hear it. But don't feel obliged.

Why do you think Thiel is a

Why do you think Thiel is a thousand times smarter than you?

self deprecation is an excellent personality trait

indicates a balanced mind with an eye that others might have something to offer. Healthy.

I don't think one has to

I don't think one has to imagine that someone is a thousand times smarter than oneself to imagine they might have something to offer. Taken seriously, it doesn't sound particulary balanced.

I was acutally wondering if Jon was guestimating Thiel's intelligence from his level of financial success or if he had another reason to think him so smart. I didn't find anything remarkable in the video.

I recently read _Fooled by Randomness_ and _The Black Swan_ by Nassim Taleb who points out that there are plenty of individuals who by sheer luck make a series of decisions that turn out to be higly profitable, so it is not smart to assume someone is smart because they made a fortune.

Technically, I said he's at least a hundred times smarter...

...than me, not a thousand times. I'm not that dumb. I'd put the number at 359.

The topic is the economy and investing, right? The proof is in the pudding: Thiel has shown the ability to exploit inefficiencies in the market and profit to the tune of over a billion dollars.

Ah see, that's what I thought

Ah see, that's what I thought you were saying.

That's really bad evidence for the reasons I gave in my comment a minute ago.

I don't know if he's skilled or not but the billion dollars is not significant evidence.

Look at the world series of poker. Since the field go big the winner is never anything like the the best player in the room. In 2006 Jamie Gold won the biggest prize ever $12 million for a few days work beating the best in the world. Jerry Yang won $8.5 million the next year with a smaller field. Yet aside from these results there is no evidence that these guys are particulary good players. They won because they made a series of lucky decisions, quite possibly a longer and more improbable series of decisions than led to Thiel's fortune.

In a game the the size of the market you are bound to find individuals who just hit five or seven or ten jackpots in a row by sheer luck even if nobody has any talent at all. They stand out like sore thumbs while the losers are invisible. And everyone assumes they're geniuses.

I do think it's significant evidence

Sure, it could be luck, but that possibility should be ranked lower than the Occam's Razor conclusion: that he's skilled at turning some money into more money.

Occam's Razor says the

Occam's Razor says the opposite. If you wrote a simulation of the stock market with millions of participants buying and selling at random you'd soon see just as many billionares in the simulation as you see in the market today even though you know for a fact that your simulated billionares have zero skill.

Chance guarantees billionares in the market but it doesn't at all guarantee that they will be especially skilled. Most of them won't be.

The only way you can know if Thiel is any good is by analyzing his reasoning. Read Taleb, he's great.

I have read Fooled by Randomness, and yes, it was great

I know exactly the argument you're making. There was even an episode of Ed based on it.

Analyzing reasoning doesn't really get you anywhere. Even lucky people have seemingly plausible reasons for what they do.

If you know the argument, what's your argument against it?

Chance will produce billionaires regardless of any skill, so what reason is there to think a random billionaire is particularly skilled?

Okay, let's agree that it's indeterminate whether Thiel is...

...smarter than me.

But let me ask you a question:

To what degree do you think American society is meritocratic? I.e., to what degree does success correlate to intelligence, hard work, ambition, etc?

We can both probably it's not 100% -- other things like luck and connections play a part. But what about the other extreme of 0%? Is American society not meritocratic at all?

Depends what you mean by

Depends what you mean by merit. On one definition, it can be 100% lucky and 100% meritocratic - let me explain before rejecting this reflexively. Suppose nobody has any idea whether iPad-like tablets will be popular. One mogul takes a chance and builds a million tablets before even one is sold (necessary to take advantage of economies of scale). Another mogul does not, predicting that tablets will not be popular enough to merit the investment.

Now there are two possible futures. Either of these two moguls could do better than the other. The successful one will be the who choices end up better serving the customer. The one building the tablets may, or may not, be wasting hundreds of millions of dollars of resources. My point is this: from the perspective of when these two moguls make their respective decision, the future is a mystery and so whether one, or the other, does better is a matter of luck. But at the same time, there is a great deal of merit in investing resources in a way that does not waste them. So the more successful mogul's choice has merit.

Now, maybe you want to define merit in a way that eliminates luck. We can do that if you prefer so let us do that here. So neither of these two moguls' decisions has more more merit than the other's since by assumption the choices are gambles (in case I didn't make it clear initially, this is a hypothetical scenario and this is one of the assumptions). I maintain that we would not want the moguls to be rewarded based on merit, ie independently of who makes the better choice when the choices are guesses. For a number of reasons. First, it would be impossible. Who is going to stand in judgment of merit? Opinions will be all over the place. People disagree about whether a given decision was luck or genius. It is hard to determine and even harder to convince all concerned. Second, the motivation for gambling is that winning will benefit the gambler. This is obviously a strong motivator: las Vegas would go out of business if at the end of the day all the gamblers were guaranteed to leave with exactly the same money they came in with. Third, we want the winning person/business to be rewarded because, even if it is luck of the draw, the winning person or business is doing something right despite it having been a lucky choice to have chosen to do that. For example, if the tablet making mogul's gamble works out, we want resources to go to him because his tablet making factories are all set up to continue to invest resouces profitably. Never mind that his decision to set them up was a gamble.

Ultimately all merit can be traced back to luck. Are you genuinely clever and not merely a lucky fool? Then you were lucky to have been born with cleverness genes and/or grown up in a cleverness-enhancing environment. Is Bob industrious while Bill is lazy? All the reasons for this can be traced back to one or another chance occurrence, eg one of them being born with a bigger frontal lobe than the other.

You heard of the econ prof who gave the same . . .

final exam every year? He simply changed the answers.

Chances are that 90% of the billionaires produced by chance got it by winning several dozen lotteries.

Gold

Johnathan,

There are several properties of a commodity that make it suitable for use as money. Gold naturally has these. However, the government has instituted laws that negate some of these natural properties by fiat. Therefore gold has been demonetized for certain uses of money. One of the uses of money that has not been demonetized in the case of gold is its use as a store of value. Next to nobody is using gold as an exchange medium. Keep that in mind.

Gold is much less valuable on the margin with the single use, and much more prone to fluctuations. Being used as a medium of exchange, a true money, would stabilize it's value and I don't expect that to happen any time soon. The quantity of gold available at current prices for use as a store of value is tiny, transaction costs are extremely high because it is not a money, and other factors like the government controlled commodity markets are going to cause lots of fluctuation.

Therefore it is very risking to invest in gold, especially with leverage.