“The public is right during the trends but wrong at both ends.” — Humphrey Neill (p. 45, “Maxims of Wall Street”)
Special Alert: Danger sign ahead? Today, the federal government released second-quarter gross output (GO), which is a broader measure of total economic activity than GDP. While consumer spending was up (again), business spending (B2B) fell sharply, down 5.6% in real terms, probably due to Trump’s trade war. I’ve never seen a bigger gap between consumer and business spending since the 2008 financial crisis. See “You Nailed It” column below.
The debate is growing on Wall Street: Will the Super Bull Market continue, or is it grossly overvalued and headed for a crash?
You’re probably wondering what the bull-bear debate has to do with Milton Friedman and Friedrich Hayek, representing the two schools of free-market economics (Chicago and Austrian). Read on!
Burt Malkiel, finance professor at Princeton and author of the bestseller “A Random Walk Down Wall Street,” doesn’t typically comment on the stock market except in times of extreme valuations. Today is one of those times; he compares today’s “irrational exuberance” to the dot-com boom of the late 1990s and even 1929.
He warns, “there are worrisome signs that investor optimism may have gotten out of hand… These days, stock market valuations are at one of the highest levels in its 230-year history when normalized.”
Indeed, the stock market is currently selling at 30 times earnings, significantly higher than it was in 1929, with the current figure also being substantially above the long-term historical average of around 16–18.
Steve Hanke, professor at Johns Hopkins University, is even more worried. He thinks the economy is entering a dangerous period, as evidenced by the weak labor market and slow growth (as measured by gross output and the money supply). He warns that the coming crisis will cause the Fed to cut rates dramatically and will push the price of gold to $6,000 an ounce!
The Case for the New Roaring Twenties
On the other hand…
Matthew Carr, one of our Eagle editors, makes the case for higher stock prices into the next year and beyond. In his “Eye on the Market,” he issues the ultimate bullish outlook:
“There’ve been 21 occasions over the past 45 years when the Fed cut rates while the S&P 500 was within 2% of its all-time high… just like the U.S. central bank did last week.
Well, guess what happened to stocks over the next year?
The rally didn’t stop.
In fact, many times momentum gained speed. And in 21 out of 21 of those events when the Fed cut near all-time highs, U.S. equities gained an average of 14.1% over the next 52 weeks.
That’s a 100% success rate. A rare feat on Wall Street.
Plus, these gains were made across the reigns of Paul Volcker, Alan Greenspan and Jerome Powell. They took place during the presidencies of Ronald Reagan, George H. W. Bush, Bill Clinton and Donald Trump.
Now, one month out from those cuts, the markets were mixed, seeing green just 52% of the time. But long-term, the evidence is clear… there’s plenty more room to run for this bull. So, ignore the naysayers and downbeat pundits.”
SO WHO’S RIGHT?
The Ultimate Debate: Austrian vs Chicago Schools
The whole debate is summarized and elaborated in my book, “Vienna and Chicago: Friends or Foes?” It’s considered the definitive guide to the two schools of free-market economics, one that tends to be bullish and the other bearish.
The Chicago School of Economics, followers of Milton Friedman and George Stigler, are the unrepentant optimists about the economy and Wall Street… and the Austrian School, supporters of Ludwig von Mises and Friedrich Hayek, are the confirmed pessimists, always worried that the stock market will crash and enter a bear market.
You can see this just by looking at the photographs of the four economists. Mises and Hayek are serious and concerned, while Friedman and Stigler are smiling and upbeat.
Both schools can claim victories: Friedman and Stigler for predicting the great American boom since World War II. (Friedman gave a lecture in 1954, “Why the American Economy is Depression Proof,” arguing the Fed would bail out the financial markets whenever there’s a crisis.)
Mises and Hayek forecast the 1929 stock market crash and Great Depression, and their followers have consistently warned of asset bubbles in stocks and commodities (“malinvestments”) that inevitably must come back down to earth.
The Wall Street establishment fit into the Chicago model and is almost always bullish; gold bugs cling to the Austrian school and are almost always predicting a stock market crash around the corner and bullish on gold.
Both schools have been right — and wrong. During the financial crisis of 2008, the Austrian school predicted it, while the Chicago school saw little to worry about. (More about that later.)
Lately, both have been right, with stocks and gold hitting new highs.
The next question: When will stocks and gold move in opposite directions?
Introducing the Friedman Hayek Center
I found the answer last month when I gave a lecture in Buenos Aires, Argentina, where I was invited to speak at the new Friedman Hayek Center for the Study of a Free Society, a joint venture between the University of CEMA in Argentina and the UTEP Center for Free Enterprise in the United States.
Mark Skousen and Andres Ignacio Aris at the Friedman Hayek Center, August 18, 2025
It is the only center in the world named after both the Chicago School (Milton Friedman) and the Austrian School (Friedrich Hayek). The Cato Institute is another organization seeking to bring the two schools together. They sponsor the Milton Friedman Prize for Advancing Liberty as well as the Hayek Auditorium.
In my book, “Vienna and Chicago: Friends or Foes?” I asked the all-important question, “Is the bridge between the Austrian and Chicago schools widening or closing?” as shown on the back cover of my book:
For years, the Austrian and Chicago economists argued over policies and outlook, and the debates were often heated. As Milton Friedman told me in response to my book title: “We are friends — and foes!” The two schools of free-market economics actually agree on most issues, but disagree on four: methodology, the gold standard, the business cycle and market failure.
In my book, I concluded that the Chicago school has an advantage in two, and the Austrian school is the other two. Thus, I managed to offend both schools by having one foot in both!
The good news is that the gap is closing, as evidenced by the creation of the Friedman Hayek center.
How? In predicting the future of the markets, the Austrians see things in the short term, a possible bear market or crash, due to excessive government spending and easy money, while the Chicago school sees things in the long run — that despite the mistakes of our leaders, the outlook for free-market capitalism is bullish.
As Adam Smith once said in “The Wealth of Nations” (1776), “The uniform, constant and uninterrupted effort of every man to better his condition is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.”
The Definitive Guide to Austrian and Chicago Schools
“Vienna and Chicago” has been hailed as the classic guide to both schools of economics. I was the right person to write this book, since I was friends with both Hayek and Friedman.
Mark Skousen interviews Friedrich Hayek (1985) and Milton Friedman (2006)
From the Chicago School, Milton Friedman wrote, “This tale is thorough, thoughtful, even-handed and highly readable. All economists, of whatever school, will find it both instructive and entertaining.”
Art Laffer, former professor at the University of Chicago with Friedman and advisor to both Reagan and Trump, said, “I don’t know whether I should love you or hate you. Your book was so good I spent half a day plus avoiding what I was supposed to do in order to read your book. It’s great!”
Roger Garrison, former Auburn professor representing the Austrian school, states, “In his upbeat tale of two schools, Skousen gives us a delightful blend of theory, history and political science, and shows that there is much common ground and scope for development.”
How to Order “Vienna and Chicago” at Discount — with a Free Bonus
This 305-page book (quality paperback) is fun to read on every page. Many followers have told me it was their introduction to my writings.
The price is only $25 postpaid, autographed and mailed for free within the United States. To order, go to Skousen Books at Discount.
Added bonus! If you order my book, I’ll send you my special report, “Austrian vs Chicago Economists: Response to the 2008 Financial Crisis,” at no extra charge. I explain why most Chicago economists failed to predict the 2008 financial crisis, while the Austrians saw it coming. Order your copy today!
You Nailed It!
GO Away: The Economy Slows to a Crawl
“By integrating the vital role of the supply chain into national income accounting, Mark Skousen’s development of gross output (GO) has created a more dynamic and broader view of the economy, and of the central role that business plays in national income, the business cycle and economic growth. I recommend that economists seriously consider his new approach to macroeconomics.” — Finn Kydland (2004 Nobel Prize economist)
Today, the federal government (Bureau of Economic Analysis) announced that gross output (GO) — the broadest measure of economic activity — slowed down in the second quarter. While GDP — which measures final output only — looks great, increasing 3.8% in real terms in the second quarter, adjusted GO grew only a tepid 0.3%. GO measures spending at all stages of production, including the all important supply chain.
More worrisome, business (B2B) spending declined a sharp 5.6% in the quarter, suggesting serious trouble ahead. The labor market data is saying the same thing. Business is shrinking!
What’s amazing is that while consumer spending continues to rise, up 2.6% in real terms, business spending dropped 5.6% in real terms in the second quarter. I haven’t seen that kind of gap since the financial crisis of 2008. Part of the reason is that businesses increased their purchases in the first quarter in anticipation of higher tariffs.
I can see why the Jay Powell and the Fed are getting worried, and decided to cut rates for the first time in years. Business spending is a leading indicator of the economy, and it looks like it’s in the tank. The stock market is on a tear, but maybe it’s time for a correction.
I’ll have a full press release sent out later today at http://www.grossoutput.com.
Good investing, AEIOU,
Mark Skousen
