¡ ¢ £ ¤ ¥ ¡ ¦ ¢ £ § ¡ ¨ © ¦ ¡ ¡ ¨ © © ¡ ¡ © © £ § ¡ £ BgÜZmbhgZg]=^ÜZmbhg e Austrian School of Economics is as relevant as never before. e present work observes and describes the bubble economy of our days, analyzes the underlying monetary policy of the central banks and makes aware of possi- ble investment philosophies. It is also about historical recollection. e future is uncertain, unambigu- ous predictions cannot be provided. e Austrian School’s perception helps us to see long-term patterns and opportunities that today are often hidden. I wish all readers an exciting journey of discovery, especially those who have to deal with the task of sustainable and value-based investments. For the authors and their important work I hope for the well-deserved success and the widest possible audience of a bestseller. H.S.H. Prince Philipp von und zu Liechtenstein, Chairman LGT Group mises.at [email protected] © 2015 scholarium Translation: Heinz Blasnik Proofreading: Douglas Moser Typesetting: Gerald Kalb Cover design: Fanny Springer Original title: Österreichische Schule für Anleger ISBN: 978-3-902639-33-2 ! ! " Preface ..........................................................................................9 Introduction ...............................................................................12 1. e Austrian School ................................................................17 Subjectivism ...............................................................................23 Marginalism ...............................................................................25 Individualism ..............................................................................31 Realism .......................................................................................37 2. e Illusion of Prosperity .......................................................41 3. Forecasts and Prophecies .........................................................59 4. e Monetary System .............................................................77 What is Money? ..........................................................................77 $e Paper Money Era .................................................................96 $e Money Supply ....................................................................100 5. Monetary Tectonics ...............................................................107 In%ation ...................................................................................107 De%ation ..................................................................................111 Tectonic Pressure Build-Up .......................................................113 6. Business Cycles .....................................................................131 Undistorted Production Structure ............................................131 Reorganization of the Production Structure ..............................134 Capital Structure ......................................................................138 Distorted Production Structure ................................................141 $e Cantillon E&ect .................................................................153 $e Skyscraper Index ................................................................156 7. Scenarios ...............................................................................165 Hyperin%ation versus Hyperde%ation .......................................165 Stag%ation.................................................................................173 Financial Repression and Compulsory Levies ............................178 Special Drawing Rights as a Global Currency ...........................182 8. Austrian Investment Philosophy ...........................................187 $e Morals of Saving ................................................................188 Pro't and Interest .....................................................................194 $e Problem with Debt ............................................................207 Hoarding ..................................................................................212 Investing ...................................................................................220 Consumption ...........................................................................227 Endowment ..............................................................................232 Speculation ...............................................................................237 A Philosophical Portfolio ..........................................................240 9. Austrian Investment Practice ................................................245 $e Permanent Portfolio ...........................................................251 Precious Metals .........................................................................257 Stocks .......................................................................................280 Analysis ....................................................................................292 Bonds .......................................................................................305 Mutual Funds ...........................................................................318 Alternative Investments .............................................................325 Conclusion ...............................................................................347 Endnotes ...................................................................................354 Authors .....................................................................................364 Preface # $ % What would Ludwig von Mises make of QE and ZIRP? Would Friedrich von Hayek be able to make sense of FOMC or ECB policy statements? What would these giants of the Austrian School and their cohorts think of hedge funds, ETFs, mutual funds and the array of other assorted investment vehicles? Would precious metals 't into an Austrian template superimposed on the present day investment world? How will the spread of government into all aspects of the private sec- tor be ultimately resolved? $e answers, in some cases obvious and in other cases complex, require an understanding of Austrian economic thought which is all too absent in modern investment discourse or media commentary. What passes for economic wisdom in the casino like 'nancial markets of the 21st century emanates from the conceptually %awed drumbeat of Keynesian analysis reconstituted into senseless quantitative aggre- gations of historical data extrapolated into future outcomes. $e prevalence of economic illiteracy evident in the constant eruptions of supposedly learned PhDs infects both public policy and investment thinking alike. $ese deeply rooted a(ictions distort valuations and investment %ows and suggest there is an inherent unsustainability for the complacent status quo. Analysis grounded in Austrian thinking has been remarkably accurate in separating illusion from reality. It provides a sensible, highly acces- sible big picture of view of what exists and what is likely to happen as a result. $at is because it portrays economic activity and likely devel- opments as the product of individual behavior, a common sense and practical framework. It does not employ abstract groups or forces that are somehow quanti'ed and correlated by unintelligible formulas, a 9 Preface methodology that succeeds only in explaining the arti'cial reality that it has created. $e challenge for the modern reader is 'rst to become acquainted with the basic precepts of Austrian economics. $ese are well explained in the following pages. For many the exercise will seem like learning a new language, a testament to the corruption of thought and percep- tion that is evident in the mainstream 'nancial media and educational system. Whatever the struggle, the result will be clarity of thinking and a removal of confusion. $e Austrian analytical framework is not a prescription for short term investment success or even a pathway to building a fortune. $ere is no such magic here. However, it does provide a foundation for sanity in the midst of mass delusion. It is grounded in ethical behavior, com- mon sense, and sober re%ection. $e Austrian investment approach eschews leverage, promotions, and fads. It is likely to steer one away from disastrous investment outcomes through a balanced approach to wealth preservation. In short, the Austrian methodology is based on reality, not fancy, and its application in daily practice will provide an investor with favorable odds to achieve 'nancial well-being. $is book is the result of extensive research. It is a compilation of wisdom from many sources 'ltered by Austrian economic thought. It is a highly relevant contribution to a complex world that cannot be understood in simplistic terms. It covers a broad range of topics rang- ing from macro to micro economics, from history to current events, from theoretical to practical, and from general to anecdotal. $e 'nancial markets of today are dominated by hyper active high frequency trading guided by trend following quantitative algorithms. Original thought is replaced by arti'cial intelligence. Market prices are manipulated and gamed by institutional and political interests. Valuations are in%ated by the zero interest rate policies of all central banks for whom it is dogma to drive up the prices of paper assets to 10 Preface in%uence the behavior of individuals and corporations to achieve their announced goals of full employment, moderate in%ation, and 'nancial