Ex-Duke Lacrosse Coach and Lessons to Learn

I just watched a 60 Minutes piece on the former Duke lacrosse head coach, Mike Pressler, who resigned 9 years ago during rape allegations against 3 of his players.

He was a scapegoat at the time and he is put in a very different light today in this 60 Minutes piece than what was being said 9 years ago.

The case itself is frustrating because 3 players were accused of rape and much of the media and many activists had already convicted the three young men before most of the facts were out, let alone their actual day in court.

This is why we don’t live in a democracy and should never want to live in a democracy.  If mob rule had had its way back then, then the three young men would have never stood a chance.

It is a relief in one sense that most of the truth eventually came out and the three accused people were acquitted by the truth.  But we can’t take for granted how horrible of an episode this must have been (and still is) for them and their friends and family.

It is also frustrating in that the criminal accuser and the prosecutor, Michael Nifong, were not held more accountable for their crimes.  If you are purposely lying in an attempt to imprison people, then doesn’t it seem just that the liars should themselves be imprisoned?

Nifong was disbarred, but should have been sent to prison, or at least paid major restitution to the three young men, who turned out to be the actual victims.

Crystal Mangum, the woman who accused them of raping her, did not serve prison time.  Instead, she got a book deal.  She ended up in prison in 2013 when she was found guilty of killing her boyfriend.

But the 60 Minutes story focused on Mike Pressler, who resigned as head coach after the allegations were made and during major protests.  He says that he was given an ultimatum of resigning or being fired.  If I had been in his position, I would have told them to fire me.

I thought it was foolish at the time.  Nearly everyone was rushing to judgment and I thought at the time that the allegations might not be true.  When you see an unruly mob of people in the streets, this is often a sign that they have their story backwards.  Mobs of people and intelligence don’t often go together, but there are exceptions.

But even if the allegations were true, I thought it was ridiculous that the head coach be fired or that he resign.  Why is he responsible?  What about the professors of the classes that the guys were in?  What about the athletic director and the Duke president?  What about campus security?  Why was it just the head coach that was originally made a scapegoat?

In the interview, Pressler said that he believed his accused players at the time and thought they were innocent.  The 60 Minutes story talked about how loyal of a guy Pressler is.  But if that is the case, then why didn’t he stick up for his players in public at the time?  Why did he go into hiding?  He didn’t have to worry about keeping quiet for an official trial.

He could have stood in front of cameras and said that we shouldn’t rush to judgment.  He also could have defended himself and said that he is not ultimately the one responsible for their actions.

Would it have been a hard thing to do?  It probably would have.  But for me, I would think it would be harder to stay silent and let your reputation go downhill.  I would think it would be hard to let your players be crucified without a fair trial up to that point.

Pressler was another victim in all of this, but he also lost his opportunity to stand up for principle and what was right at the time because he was afraid of standing up to the mobs in the street.  He was afraid of the media.  I don’t really know this for sure, but that is my guess.

Sometimes you face situations in life that are difficult and almost seem unfair because you didn’t bring them on and didn’t ask for them.  This is what happened to Joe Paterno at Penn State and he ended up with a tainted reputation at the end of his life, and rightly so.

I am not putting Pressler on the same level as Paterno, but they are both cases of where you just have to sometimes stand up and do the right thing, even if it goes against the grain and even if it is a hard thing to do in the short run.

There are a lot of lessons to be learned from this story.

Austrian Business Cycle Theory and the Stock Market

Frank Shostak of the Mises Institute has written a piece on how easy money drives the stock market.  He points out that history shows an increase in the money supply generally precedes a rise in the stock market.

Conversely, a decline in the growth of money generally precedes a drop in the stock market.  He goes back as far as the 1920s and uses the big stock crashes in American history to make his point.

At the end of his article, he suggests that the stock market (he uses the S&P 500) is highly vulnerable because of the fall in liquidity from June 2009 to June 2010.

As noted in Shostak’s article, there is usually a time lag, typically longer than a year, as it takes time for the change to filter through the system.  However, if he is marking June 2010 as the end of a big fall in liquidity, then a 6-year time lag seems awfully long.

But this ignores QE3, which was the Fed’s biggest and longest round of monetary inflation.  The Fed created about $1 trillion in 2013 alone and slowly wound it down in 2014.

We must remember that the Austrian Business Cycle Theory says that you do not necessarily have to have a declining money supply, or even a stable money supply to have a bust.  If the rate of growth is decreasing, this can be enough to expose the malinvestments and bring on a bust, or at least the popping of bubbles.

Even if the rate of inflation stays stable, say at 20%, you will eventually get a bust.  The only way to prevent the bust is by continually increasing the rate of the growth of money.  Eventually, this leads to hyperinflation, which is the biggest bust of all.

I believe that if the Fed had stabilized the monetary base a few years ago and kept it that way, thus having no QE3, then we would have already seen a major bust.  But QE3 was enough of an injection to stall the bust.  Of course, it will also make the bust worse when it eventually does come.

We must also remember that we have already seen oil fall to below $50 per barrel.  There has been a bust in the oil market, which just so happens to be good for most consumers.

Overall, I am in general agreement with Shostak that there is a stock bubble that has been fueled by the Fed.  With its current stable money policy, the bubble in stocks is quite vulnerable.

I advocate a permanent portfolio for a good portion of your investments, which will include 25% in stocks.  But outside of this, and perhaps a few speculative plays in mining stocks, I would avoid stocks right now.  If you are feeling particularly courageous, you might even consider a small short position at this point.

The Austrian Business Cycle Theory tells us that a bust is coming, unless the Fed decides to ramp up its digital printing press again, which seems unlikely right now.  I think a big downturn in stocks is more a question of when at this point.

Low Rates Worldwide

As I write this, the 10-year yield for U.S. Treasuries is under 2%.  You can buy a 10-year bond and it will pay out less than 2% per year in interest, which probably doesn’t even keep up with inflation.  And who knows how high price inflation will be in 10 years when you get your last interest payment and your original principal back.

It is crazy though that the U.S. 10-year yield is higher than many other countries.  For example, Spain, Italy, and the U.K. all have 10-year rates that are lower.

In Japan, where the central bank is engaging in unprecedented monetary inflation, the 10-year yield for Japanese government debt is just 0.37%.  You can loan your money to the near-insolvent Japanese government, with all of its bloated debt, for the privilege of getting an interest payout of less than half a percent per year.

It is even worse in Germany, although slightly more understandable there.  The 10-year yield is just 0.16% as of this writing.  People in Europe are looking for safety and Germany is the least bad.  If I were in Greece with the threat of bank “bail-ins”, I would certainly consider putting some of my money into German debt, just for the possibility of getting a decent portion of it back.  It might be the best option available, especially if it is hard to buy and store gold.

This all represents fear.  People are looking for safety.  They don’t seem too concerned about inflation, even though central banks have been, or currently are, printing a lot of digital money.

I was surprised to see that David Stockman is predicting some kind of a deflationary situation to continue and get worse.  I agree with most of what he has to say, but I don’t think we are going to see any sustained deflation.  As Ben Bernanke once said, a determined central bank can always create positive price inflation.

Regardless of whether we ultimately see really high price inflation, it is important to realize that central bank inflation does great damage to the economy, even if it doesn’t show up in consumer prices.   It misallocates resources and hurts our living standards.  It misallocates savings and investments and causes less productivity in the future.

In terms of shorting the bond market, I still don’t think the time is right.  If we hit another recession, U.S. rates could easily go lower still. I don’t think we are going to see higher interest rates until we see a significant uptick in price inflation.  Right now, the CPI numbers are coming in too low.

Since there is little perceived threat of price inflation and there is almost no chance of default on U.S. government debt (in nominal terms), rates are staying low, even with the Fed’s current tight monetary policy.

There will probably be a day when shorting bonds will pay very well.  That day is not today or tomorrow.  It probably won’t be in 2015.

Adjusted Monetary Base – April 2, 2015

Every so often, I like to look at the adjusted monetary base.  It is really the one thing that the Fed most directly controls.  It is a reflection of monetary inflation, but not necessarily a reflection of money in circulation.

You can view the latest chart here.

The monetary base has been up and down a bit, but basically hanging around the 4 trillion dollar level.  There are always going to be little ups and downs because of maturing debt that needs to be rolled over.

The monetary base is consistent with Fed policy right now.  The Fed ended QE3, or whatever you want to call it, back at the end of October 2014.  It now has a policy of stable money, at least for now.

Meanwhile, excess reserves held by depository institutions have also seemed to level off.  The chart for excess reserves over the last 7 years has basically mimicked that of the monetary base.  They have gone up and leveled off in tandem.

This is why the monetary base is not an accurate reflection of the money in circulation.  Much of the new money created by the Fed over the last 7 years has not been lent out by banks.  It is sitting there “earning” 0.25% interest with the Fed.

This has helped keep a lid on price inflation.  If all of this new money had been lent by banks to the legal limit, then we likely would have seen an explosion in price inflation.

This is also a big reason on why the federal funds rate has meant little over the last several years.  Banks do not need to borrow overnight money if they are already above the mandated reserve requirements.

The federal funds rate also doesn’t matter much because it is not dictating Fed policy.  The Fed is now telling us directly in the FOMC statements if is expanding the monetary base.  Over the last 5 months, it has been the Fed’s policy to keep a level monetary base by just rolling over maturing debt.

I am a believer in the Austrian Business Cycle Theory.  When there is an artificial boom and the central bank does not continue to provide loose money, then it will eventually expose the malinvestments and lead to something of a bust.  So if the Fed keeps its current policy, then I do expect a recession to hit at some point.  I think a lower stock market will probably lead the way.

The most interesting aspect will be when we actually do hit the next bump in the road.  Will the Fed keep a tight money policy or will it go back to another round of QE?  My bet is on the latter.