Kevin Duffy Bearing Asset Management, LLC

1. Navigating the Financial Markets with an Austrian CompassMises Circle, New York CityMay 22, 2010 Kevin Duffy Bearing Asset Management, LLC

2. Bullet train to serfdom • “At the rate things are going, we are all going to end up working for the Japanese.”~ Lester Thurow, MIT economist, 1989 • “The United States is rapidly becoming a colony of Japan.”~ Congresswoman Helen Bentley, 1990 • “The Cold War is over, and Japan won.”~ Sen. Paul Tsongas, 1992 August 7, 1989

3. Austrian school warnings unheeded • If anything is new about banking in the 1980s, it is the substitution of federal guarantees for the liquidity of individual banks. It is the policy that, even in smaller institutions, depositors will be protected. It is this regulatory sea change that distinguishes the current debt expansion from so many earlier ones. Professor Rothbard’s theory holds that a run-resistant, semi-socialized, fractional reserve banking system is a house of cards. • ~ James Grant, “Bring Back the Bank Run,” The Free Market, February 1990

4. “Entrepreneurial judgment cannot be bought on the market. The entrepreneurial idea that carries on and brings profit is precisely that idea which did not occur to the majority. It is not correct foresight as such that yields profits, but foresight better than that of the rest. The prize goes only to the dissenters, who do not let themselves be misled by the errors accepted by the multitude.” Ludwig von Mises, Human Action

5. Viewing the world through two different lenses

6. Empirical case for non-intervention • Current economic system is interventionist • Intervention institutionalized in 1913 – Federal Reserve • Crises and responses keep increasing in magnitude • Each crisis gets closer to government • Failure of regulation theory • Less regulated hedge funds – why weren’t they at the center of the crisis? • Heavily regulated banks – at the center of the crisis • Regulatory failure - rating agencies (1973-1975) • Interventionists continually get it wrong • Interventionists resort to falsehoods • Corruption of language • Corruption of history

7. Corruption of language • “This was about the invisible hand having a party, a non-regulated drinking party, with rating agencies handing out the fake IDs!” ~ Paul McCulley, PIMCO, on the financial meltdown • “This laissez faire really has killed us.” ~ Jim Cramer, interviewing Rep. Barney Frank, January 21, 2010 • “No one likes to put the taxpayer into situations like this… Government intervention is not something I came down here wanting to espouse, but it sure is better than the alternative.”~ Henry Paulson, Treasury Secretary, on the government takeover of Fannie Mae and Freddie Mac, September 8, 2008 • “I'm not looking for extraordinary power.”~ Henry Paulson, Treasury Secretary, on TARP, September 24, 2008

8. Corruption of history • “Depression scholars – including Bernanke – tend to see the Hoover administration’s approach of balancing budgets and tightening belts during the downturn as a tragic mistake. They embrace the Keynesian view that aggressive government action backed by government money is needed to reverse death spirals by restoring confidence and reviving demand.” ~ Time 2009 Person of the Year, December 28, 2009 • “Those who contended that during the period of my administration our economic system was one of laissez faire have little knowledge of the extent of government regulation. The economic philosophy of laissez faire, or "dog eat dog," had died in the United States forty years before, when Congress passed the Interstate Commerce Commission and the Sherman Anti-Trust Acts.”~ Herbert Hoover

9. Corruption of history “Nobody saw this coming.” ~ Angelo Mozilo, CEO, Countrywide Financial, July 24, 2007

10. Interventionists get it wrong • “This correction will run its course until the middle of the year. Then things will turn up again, because not even Greenspan can stop the Internet economy.”~ Larry Kudlow, The New York Post, February 25, 2000 • “The Federal Reserve will announce a monetary policy decision Tuesday afternoon amidst great turmoil in the world economy. Let's hope they make the right move and open the money spigots.”~ Larry Kudlow, National Review Online, September 24, 2002 • “I wouldn't panic. Investors should stay in for the long-term. Goldilocks is alive and well.”~ Larry Kudlow, CNBC, December 11, 2007

11. “Time and again, when confronted with negative financial "surprises" by corporate issuers during the last decade, the "independent" ratings agencies fell down on the job. This kept slow-on-the-uptake investors dancing on the decks of numerous financial Titanics, while those heeding other signals (such as the burgeoning market for credit-default derivatives) prepared to man the lifeboats.” James Chanos, “Short-Lived Lessons From an Enron Short" The Wall Street Journal, May 30, 2006

12. Short sellers: Shoot the messenger • “It's very natural for us all to overreact in times of stress, but I'm not a fan of unmitigated shorting.We have nearly $2 trillion in hedge funds that simply don't have any reporting responsibilities.” ~ Charles Schwab, BusinessWeek, July 16, 2008 • “I’m for markets. But when it felt like it had gotten abusive, when it was free money to short-sellers who were piling on, it felt less like the market and more like it was being manipulated.I crossed over.” ~ Lloyd Blankfein, CEO, Goldman Sachs, January 2010

13. Regulation: The lessons of Enron • “Conviction on all 49 counts makes this unlikely in the future. This is good: it restores confidence… We were in the biggest bubble in history... I don't think that's going to happen for a long time…There were lessons I think that were learned.”~ Jeremy Siegel, as appeared on CNBC, May 26, 2006 • “Now we have a greater appreciation of the role of watchdogs. Sarbanes-Oxley was a good idea, is a good idea. Leave it alone. We need it to prevent the Enrons of the future.”~ Anthony M. Sabino, law professor, St. John's University, Washington Post, May 26, 2006

14. The trouble with stimulus “Most remarkably, the craziness isn’t likely to stop anytime soon. The low cost of capital is probably going to last ‘five to seven years,’ says Sam Zell.” “James W. Paulsen… sees an even longer horizon: ‘This could be a prolonged cycle where the cost of capital is low [for] 10 or 20 years.’” “Why money may stay cheap longer than you think” February 19, 2007

15. Recrimination cycle top? “As Washington gets down to the hard work of putting laws into place that are designed to prevent another crisis, they are shaping the way government will protect investors and consumers for the next generation.” “The women charged with cleaning up the mess” May 24, 2010

16. Stimulus déjà vu “The tale of the economy's remarkable turnaround is largely the story of swift reaction, a willingness to write off bad debts and restructure, and an embrace of efficiency—disciplines largely invented in the U.S. and at which it still excels. America still leads the world at processing failure, at latching on to new innovations and building them to scale quickly and profitably.” “The remarkable tale of our economic turnaround” April 19, 2010

17. Stimulus déjà vu “When you take it all together, the response was massive, unprecedented, and ultimately successful,” says Mark Zandi, chief economist at Moody’s Economy.com. “The Case For More Stimulus” – p. 33 “Obamanomics is working better than you think. Who says? Wall Street” April 19, 2010

18. “One trillion dollars is a big number. This is enough to buy all of Greece's debt twice, with enough left over to buy all of Portugal's debt. It was meant to remove any potential for contagion. Problem solved.” ~Alan Skrainka, Chief Market Strategist, Edward Jones, Barron's, May 15, 2010

19. “We’re bullish until the bill comes due.” Jason Trennart, as appeared on CNBC, December 9, 2009

20. Fool me once…