Question and Answer Session

0:00I've got one piece of evidence to that, that in Chicago there wasn't a single hotel built or office building built until the 1950s. I'm wondering if you have supporting data or other things to suggest. The fact that there wasn't a hotel built for more than five years after the war in Chicago gives you some idea about the lasting impact on our real standard of living. The issue of did the World War II get us out of the Great Depression was really settled, I think, by Bob Higgs, Robert Higgs, in an article in the Journal of Economic History back in 1992.

0:48and he actually opens the article with a quote from Ludwig von Mises and basically what Hayek showed was that the level of consumption by Americans during World War II was actually a little bit lower than the level of consumption during the Great Depression so that Americans in their ability to consume were actually worse off during the Great Depression and so he argues that World War II did not get us out of the Great Depression and that it was the ending of the war that actually got us out of the 15-year depression. I actually was very interested in that subject for a number of years and I actually did some sophisticated econometrics on the stock market during that period.

1:42period. And what I found out, and this is the only known case that I know of, is that on the day that Roosevelt's death was reported, the stock market actually took, started a rebound that hadn't experienced for over 15 years really. And so you could think of Roosevelt's death as giving us out of the Great Depression, not what he did in terms of policies. How would you respond to the claim that the war economy helps us get the internet and the common energy and things like that, that people claim that good things come out of war economy? Well, there are a few things that do come out of these massive government programs in terms of leading the Russians to the moon.

2:35We didn't get much out of that at all, but we did get Tang, vitamin C supplement. But there are a few things related. Now, atomic energy, of course, would have been developed anyways. It's really an alternative fuel that doesn't have any, it has very limited superior uses where you know existing fuel could be used in a better way but also you have the simple fact that the government is using massive amounts of resources in these projects so you have to think in terms of what was the alternative use of those of all those resources sure you might generate a few seeds of technology or innovation, but the overall impact is very, very limited, I would say.

3:36Yeah, what is seen and not seen, right?

3:45I'm finishing up my initial commitment as an officer, a junior officer now. A couple things they do, just to give you an idea of the mentality of the senior leadership and the typical junior officer in the military today, to his question, they're constantly spreading propaganda of these sorts of projects, are what really is the backbone of the American economy. One general came by to talk to us about retention issues and said that the American military deserves the credit for the great economy in the past five years because we've kept the world, you know, kept them in line.

4:30And they also, they use, you know, it's just the mentality that these people are too stupid to invest their stuff and technology The Federal Reserve and technology will work unless we did it for them, and they really buy that, so they really are socialists, they may pass themselves off as cultural conservatives, but they're socialists in their thinking, in their bureaucrats, but the effect morally, because you're talking about the moral effect, especially on younger people, is the thing that's detrimental, because people talk about bringing out courage or that sort of thing, certainly difficult trying situations bring out courage in individual people. They also tend to be the individual people that will stand up for something when everyone else is going along the party line.

5:16And that is exactly what they kill from the very beginning. They talk about excellence, but from the very beginning, like for instance at the Air Force Academy, they kill any sense of individual responsibility. That's right, because you have a meeting. They kill it outright and say, if you, whatever happens, if you're so-and-so messes up and it's on your head. So the thing that they inject that makes it even worse is that people tend to stop their moral reasoning at the level that they can justify, that they find the level of moral justification for their lives, and then anything beyond that they can live however they want. And what the military does, especially when younger people, as it says, what you're doing is you're serving your country and you're being selfless and therefore you're a good person, Well, everybody's got to have a party line in that board. You know, there's a good deal of, for lack of a better term, brainwashing to get a unit to serve under such difficult circumstances.

6:25It's not surprising that all armies have done that, you know, except for mercenary armies all the way back in time. The democracy makes it worse because it gives you this abstraction that you're supposedly supporting. You're not, you know, taking an oath to help you, you're taking an oath to just document it as a way of life. One of the things I was thinking of sort of connecting the earlier point and what Jean was talking about in terms of mathematics and Mathematics was the recent movie The Beautiful Mind that came out where they have all these mathematicians and these modelers and decipherers and stuff, the greatest minds in American society, and what's the whole show about is bringing these most capable minds in society and putting them into these military spy type think tanks.

7:21and of course what was actually going on, even though Nash was given the most prestigious position in one of these institutes, he gets there and is bored to tears, basically doesn't have anything to do. He and his staff of leading mathematicians are not really doing very much, and so much. Of course, ultimately a few of them did make deciphering codes and that sort of thing very successful, but in total you have a massive mental capital investment on the part of the military taking that out of the private sector and bringing it into the public sector and seeing very little productivity come about as a result.

8:08Jim, I've got a question about the financial models we have, and it's quite interesting, but I found it a bit puzzling, like, if you guys have to adjust each time there's some particular change, why do you have those models? What's the point of it? If things are falling into a particular trend line, then we don't need any models. I mean, like in the bull market, I remember there was a lady who spoke extremely well and asked her, what's the principle? She was listening to the backing of the dog. If the dog would bark twice, she would bark twice. If it barked twice, she would sell it. She was doing extremely well. The trend is out for us. It doesn't matter what you do, you're just doing well, right?

8:53What I'd say is that the model can, you have to develop a model robust enough to withstand minor changes in interpretation in the market. When I say they stop it and change it, you know, often in the day, the model may run all day trading the deal for all the traders and never be stopped. Working on this, I had said that, you know, the model can, you have to change the model when you get a major change in reinterpretation.

9:42I stopped and thought, well, what's major? Well, major is how much margin does your model give you? You know, these people are looking for three cents a share and, you know, it's only an interpretation that's going to throw things off by more than that, that makes them stop the model. What they get out of it is, and they're not looking at a trend, you know, doing Apple and Sun are gone, but, you know, they're going, they're not picking market direction or anything. They're just looking for stocks coming out of a set parameter. There's a whole bunch of things they feed into it. You know, the details of the model are very proprietary. But what they get to do is they can let the computer trade all day, most days, for them.

10:36And as I said, you know, they've done this for years and churned out this three cents a share Is this the same model each year?

11:12They stop it, think about it, perhaps input new parameters, they keep evolving it when they find, they keep analyzing the P&L over all the mergers they're doing and keep evolving it. It sounds to me, especially your explanation about mergers, that a lot of people do that on a fundamental basis. Without using the computer, they're looking for a bigger chunk, you're looking, you're using a computer to try to get those little chunks. Without the computerization, the tiny increments we're looking to pick up would be... We couldn't do it so fast and so frequently during the day. We couldn't keep picking up those three cents all day long. It sounds like it's very different from what long-term capital management is.

12:00They seem to be aspiring to find the model that would explain the whole world and make money forever. Wasn't that your sense of the culture of that place? Yeah, I'm not that familiar with them, but yeah, and I think they got unhedged too. I think they wound up seriously unhedged. One thing we try to do is always be market neutral. You know, the Enron 102,000 shares was purely a computer bug. We are never net long or net short. We're always looking to buy and sell at the same time. But launch from capital at the beginning was just like this firm. Okay, we're just harboring the difference between a cash security and a future security in a bond market, a bond market everywhere.

12:48It's very similar, just looking for tiny incremental change and doing it on a lesser basis. You know, I think one thing that happened was they kept getting capital and they didn't have enough of that to invest in, so they started going out into riskier and riskier things. These people keep returning capital to the partners because they only want the amount of capital that they see they can do this arbitrage with.

13:21It's a private firm.

13:27Well, but they have to give me my return on the capital. Now, it could be that they're giving me that and they didn't really make it and they just like me, but I don't... People in this kind of work say all kinds of things all day long, out there, so... Sure, but as I said, the cash is there at the end of the year. At the end of the day, it's just like the guy who developed a way to beat the roulette table by a penny at the time. That's not the custom process. There's nothing entrepreneurial about it. I think that's it. Yes, this question is for you Mark. Apart from all the bad things that you said happened during war, what do you think about this theory about blowbacks or unintended consequences? Well, war certainly has a lot of unintended consequences.

14:20Consequences, it results in new entangling alliances, it results of course even for the victor in a war that you're going to be long term involved in the affairs of other countries, that sort of thing. I'm not sure exactly what the unintended, the area of unintended consequences you're What are you referring to, because there's so many domestic, economic, personal liberties, the list is really endless. Is there a specific area that you were thinking about? Well, there was one mention, I think that came from the CIA, And the same thing could be said about Afghanistan itself, where you had a fairly neutral regime, replaced by the Russians and then we're in there covertly supporting the Mujahideen and the groups like the Bin Laden people we're part of and you know and so they do, it does seem to always get worse over time when you start involving yourself covertly in these regimes and a lot of that stuff has come home to roost and it just seems to get worse

16:06The Iran case has certainly been that way for quite a long time, and of course Afghanistan is really a very unfortunate circumstance. Short-term gain for a very long-term loss. Is it true that big financial institutions throughout history have provoked two different groups to cause the war, to make the finances, to make the money, is that the deal?

16:54In that component of the economy go the devils, the group of devils, they're the ones that do benefit from the war. Of course, you know, you're making munitions, you have to finance the war, you have to finance the debt, and all of that is a big money making process. And so in every war in the United States and most other places, the Revolutionary War, Spanish-American War, Certainly the Civil War and the Nordic side, World War I and II, they all resulted in big gains for the people who were helping the government finance the war itself. And so to the extent that they're in there provoking the war, I'm not really familiar with a lot of that, but they certainly end up benefiting from it as a result.

17:48Jean, I found the Mises quote really fascinating about entrepreneurial profit. Is he basically saying that the entrepreneurial profit, whether it be through entrepreneurs or investors, goes to the contrarian? Well, if everyone already knows that the change circumstances are going to increase the demand for wheat, the demand for wheat will, the price for wheat will already be at the final level that reflects that change. So he's in several places in Human Action he says it's people who first understand, you know first, the early, the people who earliest understand what the impact of some change will be, correctly understand it, will be the ones who get entrepreneurial profits.

18:42A lesson here for the Austrian economics movement, that if all the mainstream economists basically agree with us, that we ought to just sort of keep a low profile, and if they're all saying the same thing and they totally disagree with us, should we be shouting from the rooftops?

19:12you know I think you try to say the truth whatever you think it is there's been some back and forth in the journals on has Austrian economics passed the market test or you know as it failed the market test you know that's that's a misapplication I to me you know you can't you can't bring market thinking into this search for intellectual truth the a squared plus b squared equals c squared, even if most investors don't think so, right?

20:09I haven't. I would say our involvement in... I'm not sure where to start. In modern times, we go backward or start back and go forward. The Mexican-American War, Spanish-American War, World War I and II, Korea-Vietnam, the current crisis. The Civil War is a tough one. You're saying these other wars we should have not entered? Yes, I would say that they could have been avoided, yes. Could have been avoided is different, I'm saying we should not have entered.

20:57That's right, but he asked... How could you avoid the World War II? Stay out of the World War I. Stay out of the World War II, that's a good start. No, but it's a hindsight kind of New York history, though. Yeah, I mean, just a few minor things. If somebody had done something right before Pearl Harbor, we could have avoided that. My point, Marco, what you said is that, you know, I understand that the United States foreign policy has often times been aggressive and arrogant, having people stationed in 140 countries around the world. I view that a little bit excessive. But on the other hand, once someone attacks you at your home base, and once you realize someone who attacks you is an irrational human being, how are you going to get... you have to do something.

21:51Now, you're telling me what we're doing wrong, but you're not saying what we should have done. Instead, having a national homeland security expanding the government perhaps is a little bit difficult, but what else could you have done under the same circumstance? That's my point. I mean, Dr. Hoppe says maybe we can get AIG and Prudential to send out mercenaries, but that's totally unrealistic and fairly idiotic, really. Well, I think that the issues like Pearl Harbor and the trade towers, when I say they could have been avoided, what I'm thinking of most directly is the fact that in both cases, if one person or one federal agency or branch of the military out of a couple of dozen in both cases had done a decent job, How do you provide security for so many airports and so many places when you're dealing with an enemy and can't even pinpoint?

23:06When anything happens, like the World Trade Power Act, that was a criminal action. You allow the criminal justice to take care of it, and then you permit private property owners, the owners don't privatize the airport, but allow the airlines or airlines or any private to take steps to protect their passengers. If they don't do that, then they're going to lose money and go out of business. Or if they do too much of it and become too vexatious, and they take their shoes off and steal your screwdriver to your eyeglass, which they did to me, then you don't go that way and you have competition. You know, I don't know, what do you do? You do a lot of private property owners who are threatened to respond.

23:52And then you're protecting the borders the whole way. And number one, the Air Force are not proud of the property. Well, what I was responding to in the question was that if we had a lot of those things as well as just any sort of compliance with what these people were supposed to be doing at the time, and it's only in hindsight that we go back and look at this sort of systemic incompetence, but those things could have very easily been avoided entirely. Not to say that that would have solved the problem, but there are, as Joseph suggests, other ways of addressing those issues. Well, the big question is, why do they want to do it to us? That's because of our meddling. They're taking out their revenge on us because they feel like we're meddling in their affairs.

24:40And that makes you completely justify what you're doing. Now, we don't feel justified, but most people in this country don't understand how much the United States is meddling in everybody's affairs. Yes, it's important, you know, and economics is always talking about rationality and, you know, and Americans looking at these other groups who may be attacking us or doing strange things in their own country. We don't see them as being rational from our perspective. It's a fact that you have to look at issues and events from the people you're actually judging.

25:26It's not that they're not irrational. That's not an issue. You can't use something that has happened. He said that we're looking at history of hindsight. History is hindsight. It's hindsight all the way back. You have to look before and ask what causes it. A single event cannot be used as a trump card for justifying one program. What happened on the trade tower cannot be justified in an entire neocon program, which includes, if they were serious, they'd pull out of Saudi Arabia for two huge reasons. A, the two huge reasons they don't, the oil interests that are involved, where Rothbard documented this in his essays for the Rothbard report.

26:14And the second thing that the Saudi Arabian government does, plays a difficult role, besides having us protect our own, is they promote the very grand result of fundamentalism that doesn't. But no one has ever even mentioned within the circles that possibility. So the motive of the people in power who we are implicitly giving their assent to is entirely different than actually protecting the life and property of the people of the United States. That's not their motive, because you can't assign them that motive after the fact. So we need to do something about that. They still must be called the cartel. Any more questions?

26:59I made these questions too big. It seems like the pages of Pilgrim's Every Day with another con job being explored, like the Invan situation in Argentina, and these are always sort of the big shock people after the fact. In the case of Argentina, I think it's listed very high on the index of economics. Freedom, and Forbes magazine had an article after article about the glorious supremacy system, and I guess Enron got very impressed. What are the things that you look for to sort of spot frauds that are out there? How do you sort of anticipate these things? What are the telltale signs? The most telltale sign is it's too good to be true.

27:46And if you lived in Houston and you knew people who worked thread run, and you were actually looking at the company, One of the things, the company was suppressing any bad news and promoting all of the good news, so it really did appear to everyone that things were too good to be true, which we really looked at. The CEO had a beach home in Galveston and liked it so much he built two more on either side. And even though he only goes down there a few weekends out of the year, he has a butler there who's making $140,000 a year. I mean, you see things like that, you think, but watch out. I don't think it's the only thing. To answer your question, I think if you look at a company's financial statements, to the extent that there's some opaqueness in there, or more questions than answers, it's time to close it up and pick up another one.

28:45I think the question is where you can't look, which is often times you can't look to Wall Street research, which doesn't often expose a lot of this kind of economic business class or whatever, because there's a real moral hazard there, and they're not incentivized to expose these kinds of things. To come back to Tony's earlier point, you know, one thing is that the trading inside this company is all completely open, it's up on the internet inside the company.

29:33as it happens and it's all computer generated and so it's not a possibility that someone is you know hand finagling these things yeah yeah yeah oh they're $100 of a capital you can do a whole lot of things nowadays, I believe that's the investment process, I think the investment process requires just a big nose, sub-common sense, and ability to reach the next level. Yeah, well, you know, there's different kinds of ways to make money in the market. If your puzzle is what economic role they're playing, they're finding mispricings.

30:20You know, are you familiar with... The book in Las Vegas, who has developed a system on the roulette table, obviously has some economic role as well. I don't see a distinction between the two. Well, are you familiar with reversals and conversions in the option market? Sure. Yeah, they find them all the time and when you find a reversal and conversion, you have two securities that are not priced correctly and they're able to discover them all day long and just pick up money but the activity that they do corrects the mispricing because they're buying the underpriced security and selling the overpriced one so the market would not stay roughly rational unless someone was busy looking for the How did the government force the exchange to go from fractions to pennies?

31:18Did that have any effect on your business? Yeah, pricing became somewhat more, tighter margins. That may also have something to do with the drop in return last year. Yeah, definitely. There were some programs, in fact, we abandoned due to that. Jean, what's the possibility that this will be declared unfair? There seems to be some pretty good profits in it, and this is exactly the kind of thing the government like to call unfair or something like that, and you put a name into it. Geez, you know, I haven't heard about anything developing in that way, and they, you know, they don't seek any publicity, they're private, they just mind their business and churn out, you know, the profit margins sound fantastic, but, you know, as Tony points out, they're trading on a good bit of margin, and it's, you know, a lot of it is the fact that they've been at it for years, they're good at it, a lot of it is, What is really their wages? Because they know what they're doing so well.

32:34You know, a lot of what looks like return on capital is really wages on their labor. I don't see anything on the horizon.