Austrian Traders Journal

There are plenty of Austrians who will make the case from A to Z about how Austrian Economics is scientific. I do not need to repeat their efforts, so I will not be making the case that Austrian Economics is deduced from a true axiom. Rather I’ll take a softer view, but one that is harder to refute. Rather than claim statements deduced from the action axiom, humans act, are a priori truths, I will simply point out that they are conditional truths. That is, they are true whenever the statement “humans act” is true.

But when non-Austrians study history or economics or any of the other areas Austrians use praxeology to study, they are never denying humans acting. Sure, they may not feature human action as the center of their models, they may aggregate humans into groups to solve more easily solve larger problems, but they aren’t denying fundamentally that human act.

The testing of hypothesis via the scientific method also implies another truth that non-Austrians accept: the demand for internal consistency. If a new data point is inconsistent with the story the hypothesis tells, the data point may be an indicator that the hypothesis is flawed, or perhaps the hypothesis indicates that the observation of the data point is somehow flawed, but something must give. Science does not abide logical inconsistency.

So when studying economics from any school’s perspective, we are implying humans act, and so all theories must be consistent with all propositions deduced from the fact that humans act. Any inconsistency tells us one of two things–either the non-Austrian theory is wrong, or humans aren’t acting. Since non-Austrian economics implicitly assume humans do act, whether the Austrians are right or wrong, whether Austrian economics is science or not, the non-Austrian hypothesis in question is certainly flawed.

From this soft position, then, I cannot truly argue that Austrian Economics is scientific, only that it is more scientific than any competing school of economics. When pressed, defenders of mainstream science ultimately become more humble, acknowledging we can never know any scientific proposition is true with 100% certainty, and that the current state of science merely represents the best we can do at this time. As per my above reasons, for now it’s the Austrian School that provides us the best economic science we have.

Yesterday I was alerted to a libertynews.com story regarding the house approval of another $100 million in taxpayer dollars for USEC Inc. (NYSE:USU). This was a stock I traded back in February of this year, buying Put options and banking when it went from $1.93 on Feb 1 down to $1.28 on Feb 10. It closed yesterday at 50 cents per share, today at 54 cents. This makes the current market cap of the company about $65 million, not even two-thirds of the amount of money it’s being given.

What’s worth noting is that the price-to-book ratio on this company is .09, which means its worth $65 million despite having over $700 million in net tangible assets. Taken at face value, USEC is worth more if it goes under than if it continues its operations. But I would have to question, if this is true, why doesn’t Mitt Romney just come along, offer to buy all outstanding shares at triple current market price thereby taking over the company, close the doors, and sell it off for a cool $500 million profit on a $200 million investment?

I’ll be honest. I don’t know the first thing about this company. I don’t know exactly what their plant looks like, what it could re-sell for, what constitutes its inventory, et cetera. What I do know is price action. Its chart is that of a dying company, and its price-to-book ratio tells me the company has been very generous in the valuation of its own assets. It’s not worth anything in-business, and it’s not worth anything out-of-business.

Maybe news of their cash infusion will cause nice multi-day spike in its stock price creating a shorting opportunity. But I warn time and time again, there’s no limit to how high the price of worthless paper can go. Now is not the time to jump the gun on shorting this stock, but this is definitely one to watch. Something to consider is the fact that USEC received a de-listing warning from the New York Stock Exchange back in April when its stock price fell under $1, so there’s likely to be a push to get it back up over $1. It could go to $5 and still maintain a market cap below its book value. I think it’s unlikely to break $1 because there are so many bag-holders, including Vanguard whose position in USEC near as I can tell dropped in value from around $13 million to about $7 million in the past 3 months.

When it comes to saving up a store of value, Austrians love gold. But the past year has been less than kind to the precious metals as gold fell just over 20% from its highs before rebounding some and silver fell nearly 50% from its highs before finding a bottom. Are the Austrians wrong? Is the run in precious metals over?

A look at the weekly charts in gold and silver show a couple of very sharp drops in each, followed by bounces, with each bounce failing to make a new high. These are bearish signs. However, after the second sharp drop in silver, silver hasn’t made a new 52-week low, either. In fact, gold and silver look to be holding support really well, and if one were to draw a trend line at each of the peaks (where the prices meet resistance), one can see that just this week that prices broke out above the trend. All signs now point to strength.

Gold holds price support during down-trend. This week, Gold breaks out above trendline resistance.

Silver holds support during downward trend. This week, breakout above trendline resistance.

I attribute the breakout this week to markets anticipating good news for the metals coming out of the FOMC this weekend. But whenever the markets are anticipating something, I get skeptical. I begin asking myself, “Okay, but what if that doesn’t happen?” In that case, silver probably would have gone back down to the 26.50-28.50 range it had been trading in the past few months, and gold would have gone back down to the 1550-1650 range. After what happened with Ron Paul at the RNC this week, I wouldn’t put it past the markets to kick me while I’m down.

In early morning trading Friday, it looked like that’s exactly what was goin to happen. I even placed a trade betting on the price of silver dropping, and profitably exited the trade once the price had fallen to a key technical level. But rather than continuing to drop, the price bounced, ultimately spiking to the week’s high. It broke through that high in the afternoon, at which point I entered in a new trade, this time betting on the price to rise further. Sure enough, it trended up the remainder of the day, ending in a spike in the last half hour before the closing bell.

Bought Puts at 9:48 AM, sold them at 10:03 AM. Bought $USLV afternoon breakout at 12:59 PM.

So I went from betting on the price to go down in the short-term to betting on it going up all in one day. The past couple of weeks have been good to gold and silver, so much so that I was anticipating a major retrace Friday. Since that did not happen, these charts are looking very strong to me. A retrace in the near term is still very likely, but it will be a lot more mild than the one I was looking for Friday.

Economists of the Austrian school know that economics is a deductive and qualitative science. This means economic theories build on one another logically rather than being discovered through experiment, and that economics can only indicate whether we can expect more or less of something rather than the exact amount. Investing according to fundamental analysis seems a more natural fit to an Austrian Economist than speculating according to technical analysis, which relies on looking at historical data. But my goal here is to make the Austrian case for technical analysis.

Austrian economists know that the price system coordinates economic activity. If some event causes a good to be in short supply, this causes the price to rise, and so people who consume the good will want to consume less while those who produce the good will want to produce more. Producers and consumers do not necessarily need to know why the price has changed–the simple fact that it has changed is sufficient to coordinate their behaviors. Faced with the complexity of a modern economy where it is impossible to know all the relevant factors, price is vital to coordination.

The same is true of stocks. At any given time, any number of fundamental factors are in play, but the stock is traded at a price, and that price is sufficient to coordinate buying and selling. Furthermore, although technical patterns are often referred to as being “psychological”, time-and-sales data represents not states of mind but rather actual instances of human action. So the task is to explain the past data and react to indicators, and it is from this perspective that I will examine chart patterns.