Stormy Weather Ahead: Wisdom from the Austrian School of Economics

By Rich Checkan

This is my second interview with Ronald Stoferle, author of the Austrian School for Investors. Ronald’s In Gold We Trust reports are covered internationally on CNBC, Wall Street Journal, Bloomberg and The Financial Times. His latest book gives a deep background instruction and guide for the individual investor, especially in times of fiscal irresponsibility and turmoil like these. Copies are available on Amazon for purchase.

We covered quite a bit of ground in this interview. As a result, we’ve broken the interview up into two parts. Here is part one. Look for part two in the next few weeks.

RICH: Your latest book, The Austrian School for Investors, has just come out in English translation. What has been the response?

RONALD: I am gratified the German version of this book became a bestseller in Europe and was nominated for several awards. The English translation is now in high demand in the U.S. It is an updated, improved and more detailed version of the German version. It is well received, because U.S. investors are feeling real pain with markets changing as they are.

RICH: Before we read the book, what should we know about the philosophy and principles of the Austrian School of Economics?

RONALD: The Austrian School is a tradition of studying economic, social and psychological phenomena that came up in Vienna in the 19th century.
One of its most central elements is the methodological individualism: the economy is understood as a social process in which the actions and subjective valuations of individual, real human beings matter. Individuals possess unique pieces of knowledge, and discover new knowledge through entrepreneurial processes. So, the knowledge structure in total is decentral and at the same time, fundamental for economic development.

This has two consequences. First, attempts of the state to intervene into the economy and to control it will necessarily fail due to a lack of knowledge. Second, as knowledge is decentral and dynamic, the future cannot be foreseen exactly. For us as investors, this means we need to be prepared for all scenarios through diversification. We tend to be value investors, similar to Warren Buffett, but keeping in mind that monetary policy can have a major impact on the development of assets.

RICH: In the U.S. we habitually allocate percentages to an asset portfolio for diversification. How do you approach this?

RONALD: We also use the familiar pie chart. We are value investors, so anything in our allocation must have an intrinsic value. In our book, we propose a ‘philosophical portfolio,’ consisting of the following: 30% liquid, 30% capital (real estate and stocks representing the means of production), 30% durable consumer goods, and 10% endowment investing.

The latter promotes education, peace or environmental concerns as a form of public good contribution. Contrary to traditional portfolios, we sincerely believe giving back is part of any investment philosophy. So is having liquid reserves instead of a debt bondage, as this offers room to maneuver and to act according to one’s own preferences – ideally anytime. But note, this philosophical portfolio is more or less a starting point for the considerations of individuals and households concerning their wealth planning; it’s not a rigid investment system. For instance, the size of relative shares depends on one’s preferences and the amount of wealth at disposal (e.g. endowment becomes more important with rising wealth).

Another portfolio we present in our book is Harry Browne’s Permanent Portfolio. In this concept, wealth is equally distributed to four asset classes – namely cash, stocks, bonds and gold – that develop contrarily under different economic scenarios.

RICH: What would you say the greatest distinction is between the material in your book and what the U.S. investor may be reading?

RONALD: The Keynesian or classical schools neglect the prominent role of the monetary system. We focus on that, as we are not in a cyclical but a systemic crisis. We see increasing instability caused by monetary policies. According to the Austrian view, central banks are setting inflationary fuses. Individual investors will be hurt by what we call Monetary Tectonics, the confluence of inflationary versus deflationary forces.

RICH: The current thinking seems to be we are in a deflationary environment. Do you agree inflation poses no present threat?

RONALD: In fact, we should already be prepared for inflation, as since 2008, an immense amount of money has been injected into the system. With regard to the global debt situation, an extended deflation simply must not occur, because it would increase the real debt burden and threaten the monetary system therewith. Thus it is crystal clear that, as in 2008, we will see – at least after the elections in the U.S. – aggressive central banks move to avoid deflation. Pressure is being built up with weak oil, weak equities and deteriorating economic data. If central banks stay true to form, they will aggressively react to create rising consumer prices and therefore inflation.

RICH: What should investors do in the face of your predicted inflation?

RONALD: Actually, it is very simple to prepare now. Our first choice is to buy gold as a traditional inflation hedge. I am also regarding commodities as very cheap right now. It’s like the wisdom of buying Christmas decorations in July, rather than December.

RICH: Would that make you a contrarian?

RONALD: I don't think so, because a contrarian’s investment strategy is a reverse function of the market and its underlying economic theory – i.e. herd behaviour, or mean reversion – is a bit shallow.

Our strategy is a function of the Austrian School of Economics which is a profound paradigm. However, the resulting strategies are often overlapping. For instance, there are many forecasters with very sophisticated econometric models who predict weak gold prices just because they are trend-driven. I totally don't think so. What I see is a weak stock market with higher volatility, and I want protection in gold. This is not because I’m a contrarian in principle; it is just the result of applying Austrian methodology which suggests investing in real value.

By all means, get yourself a copy of Ronald’s book. It is worth the read and jam-packed with information. Then, call us at 800-831-0007 or send us an email to take care of your gold allocation.