Scott Sumner and Warren Mosler as Congenital Opposites

     Obviously on the level of policy or theory the 2 couldn't be more different but what I find interesting is how different the 2 are on a personal level. Yes, I know you can argue to avoid 'personalities' and I agree that intellectual substance deserves the most favored place at the table, but I'm struck by the difference between them personally as well.

     Sumner argues for EMH which means that overtime no one can consistently beat the market except for luck. Even Warren Buffett's success can be chalked up to luck:

     "One of my least favorite maxims is; “the market can stay irrational longer than you can stay solvent.”  I consider that to be a cop out for losers.  If the market is actually irrational, you set up a long term investment strategy to take advantage of that inefficiency.  You don’t gamble everything on one role of the dice.  There should be “anti-EMH” mutual funds that invest on the assumption of market inefficiency, and these should tend to earn above normal rates of return on long term investments."

   "The past five years should have been an absolute gold mine for the anti-EMH types that supposedly dominates the hedge fund industry.  Just think about it.  Shiller says stocks are way too volatile, and the US stock market has been incredibly volatile since 2007.  No need to worry about the market staying irrational for too long, the long run adjustments occurred quite rapidly.  Then we had the mother of all housing bubbles in 2006, another great opportunity for people to rake in profits from market inefficiency.  The year 2008 should have seen extraordinary profits to the hedge fund industry, with all that “irrationality” being corrected.  Instead they lost more than they’d made over the previous decade."

    "One guy did beat the market by betting the housing bubble would collapse, but I recently read that he’s been doing poorly ever since.  And we all know about the unfortunate stock market call by Mr. Roubini  in 2009."

     "The anti-EMH crowd needs to face facts.  Even the smart money can’t beat the market, except by luck."

     http://www.themoneyillusion.com/?p=12801

     "Here’s another article showing the efficiency of markets:

Warren Buffett made a friendly bet four years ago that funds that invest in hedge funds for their clients couldn’t beat the stock market over a decade. So far he’s winning.

The 81-year-old Buffett, who is chairman of the holding companyBerkshire Hathaway Inc. (BRK/A), ended last year neck and neck with the Protégé funds as the Vanguard fund climbed by 2.1 percent and the Protégé hedge funds lost an estimated 3.75 percent.

The first two months of this year pushed the Vanguard fund ahead as stocks returned 9 percent, more than twice the gains of hedge funds.

    "If you do the math the performance gap is around 10%, even larger than four years of the 1.25% annual expense ratio for mutual funds that invest in hedge funds. They’d have been better off throwing darts."

    "But before Buffett gets too cocky, he might want to consider the final sentence of the article:

    "Berkshire Hathaway shares have slumped almost 17 percent since the end of 2007."

    "Ouch! Three years ago I argued that even if markets were perfectly efficient, they would look inefficient. That’s because for every 1,000,000 investors you’d expect one guy to outperform the market for 20 consecutive years. The masses would call that lucky guy a genius, even if he was just an average bloke from Nebraska."

     http://www.themoneyillusion.com/?p=13648

     On the other hand, Mosler never tires of regaling us with how successful he has been at trading bonds and arbitrage. 

     "Illinois Income Investors specialized in fixed income arbitrage, utilizing both actual securities and related derivative products, with a market neutral/0 duration strategy. That meant we promised no interest rate exposure, rates going up or down were not supposed to be a factor in the level of profits. We were paid 35% of the profits but no fixed management fees. Over the next fifteen years, we continued the success we’d had at William Blair and Company. Including the time at Blair, we established a 20-year track record (from 1978 to 1997) with only one losing month, a drop of a tenth of one percent on a mark to market that reversed the next month, and no losing trades that any of us can recall. III was ranked Number One in the world for the highest risk-adjusted spreads by Managed Account Reports through 1997. When I stepped down, Cliff Viner took control of about $3.5 billion in capital and $35 billion in assets. The 1996 drama with the Tokyo Futures exchange along with philosophical differences with a new partner told me it was a good time to take a break."

     http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

     I find this paradoxical as Sumner is supposed the be the free market guy, while Mosler is the one who thinks the market suffers from acute inefficiencies that require a comprehensive response from the govt. It's interesting that Keynes too had some very definite views and theories of the market and as is well known, was a very successful investor. 

     http://www.wsj.com/articles/SB10001424052702304177104577313810084976558

   It seems that most of the conservative RE guys would never do the market-most of them are college professors besides which tend to be a conservative lot personally I mean here rather than politically; ie, cautious-but Keynesian, 'hyperfiscalist' types play the market and believe it can be beaten. 

    The question begs why, if you believe the market wholly rational and price changes to resemble a 'random walk' you would even bother with the market. Nick Rowe says its a paradox: if investors believe the market is rational, if they believe it is irrational it is rational. I can't find the link right now for that. 

    Sumner and Tony Yates have gotten into it now-which I'm kind of jazzed to see.

  

     https://longandvariable.wordpress.com/2015/02/27/market-monetarists-and-the-myth-of-long-and-variable-lags/

    http://www.themoneyillusion.com/?p=28775

     http://www.themoneyillusion.com/?p=6693

    I'm glad to see Yates calling him out. However,  Yates  made the following comment on Twitter I have mixed feelings about:

   "MaMoism: throwback 2 the days of 'gentleman' economist who swapped words by the fireside + left the rest of us to work out what they meant."

I have no objection to his calling MMers 'MaMoism' but I guess what I have mixed feelings with is how low a regard he holds intuition. For Yates, it's not just that 'The model makes the man' it's that 'Men don't matter just models.' For one thing, as a layman I don't do models Yet, I do think besides this that he betrays a common attitude in 'modern macro' where unless you have a model you have no voice-a new type of disenfranchisement?

His knocking of the 'gentleman economist' is, of course, directed at Sumner but of course can just as much be directed at Keynes. The irony is that it was during the 'Keynesian Revolution' in America, that this mathematization of econ started. Even as American economist became 'Keynesians' they more and more eschewed Keynes the man and his style. Nothing provokes mainstream Macros more than comments that seem to hinge on 'What Keynes really meant.' For some reason they find that as the most absurd question in the world.

http://diaryofarepublicanhater.blogspot.com/2014/05/katrik-athreya-modern-macroeconomics.html

Is the idea supposed to be that intuition doesn't matter or are the models supposed to shine a light on intuition?

On the other hand, Yates said this in the comments section of his own blog which shows why he believes it's so important to say 'Show me the models.'

A commentator had asked him this:

“I’m sure these mix-ups would get ironed out if MaMos stopped blogging and chucking words about, and got down to building and simulating quantitative models.”

    "Wouldn't they just build models that agree with their school of thought, like all model builders?"

      https://longandvariable.wordpress.com/2015/02/27/market-monetarists-and-the-myth-of-long-and-variable-lags/

      Yates replied thusly:

     "You might be right that some have ulterior motives in building their models. But the beauty of this way of proceeding is that it doesn’t matter. Once it’s built we can all inspect how well it does at matching the data and compare it to other competing models."

       Meanwhile, Ray Lopez-who usually comments over at Money Illusion and Sumner is not a fan of to say the least-Ray does seem to have some Major Freedom qualities and some have claimed that they are one in the same person; however, Ray is much shorter in his comments for one thing-said this:

     "Sumner engages in metaphysics, see his blog post on this topic raised by Yates. Expectations fairy is the key. But this is untestable."

      See that sounds rather Major Freedomlike and clearly like an Internet Austrian who are always accusing others of 'engaging in metaphysics.' Here was Yates' response though:

     "I don’t think it is completely untestable. We can measure expectations and detect their rationality, or lack of it. Usually, such measures fail pretty badly. There are ways of rescuing RE despite these apparent failures, since all tests involve auxiliary assumptions too, but the totality of the evidence makes these rescues highly far-fetched in my view."

      So maybe you're like me and think they go too far in elevating models over intuition but Yates does give an attractive picture of what he thinks models can achieve-a way to really filter out bias.  

      Overall, though I'm enjoying it a little: apparently Sumner's peers aren't so impressed. 

      UPDATE: For more on the mathematicization of economics, see Krugman's piece today. 

     http://krugman.blogs.nytimes.com/2015/02/28/empire-of-the-institute/?module=BlogPost-ReadMore&version=Blog%20Main&action=Click&contentCollection=Opinion&pgtype=Blogs&region=Body#more-38207