The price of everything

A new golden age

“The designers of the good ship euro wanted to create the greatest liner of the age. But as everybody now knows, it was fit only for fair-weather sailing, with an anarchic crew and no lifeboat. Its rules of economic seamanship were rudimentary, and were broken anyway. When it struck a reef two years ago, the water flooded one compartment after another.. European officials now recognise the folly of creating the euro without preparing for trouble. It would be wise to be planning now for what to do if it sinks.. Even now, after decades of “European construction”, many Eurocrats cannot conceive of the euro as a wreck. Those who have worked hardest to keep it afloat are exhausted and know it is not in their power to save it anyway.”

-       Charlemagne in ‘The Economist’, November 26th.

The business of investment for at least the past four years has been akin to conducting a detective inquiry: whodunit ? Just how did we end up in this mess ? To tackle one’s enemy, one first needs to identify it. In the popular conception, a myth gleefully adopted by politicians, it is all down to corrupt American investment banks, poisoning the collective well of global capital with subprime mortgage filth – what Professor Robert Vambery in this week’s Economist nicely if grimly refers to as adding three quarts of milk to a quart of sewage and creating four quarts of sewage in the process. And then the poison spread. It is a neat little tale but nowhere near sufficient to explain the extent of our current malaise. We can throw some mud in the direction of politicians, but that is a little like shooting the messenger; they have only been dispensing the bread and circuses and pension and welfare benefits on the never-never that everybody has been clamouring for. The culprit we find the most culpable, and which draws all these disparate threads of blame into one cohesive narrative, is a fundamentally corrupt money system.

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Splendid isolation ?

“Clearly, Field Marshal Haig is about to make yet another gargantuan effort to move his drinks cabinet six inches closer to Berlin.”

 

-       Captain Blackadder [Rowan Atkinson], from ‘Blackadder Goes Forth’, written by Richard Curtis and Ben Elton.

By some accounts, the general populace in Europe during July 1914 was largely unaware of the imminence of war until the end of the month. “Enjoying the warmth of a golden summer, Europe’s citizens turned their attention chiefly to news of more local importance.” And then a network of alliances, and events, exerted their inexorable gravitational pull, drawing what would become millions into a pan-Continental mincing machine. Archduke Franz Ferdinand had been assassinated on 28 June. Austria-Hungary issued an ultimatum to Serbia on 23 July, and issued a formal declaration of war on 28 July. Russia and Austria-Hungary mobilised on 30 July. Germany demanded that Russia demobilise on 31 July. Germany and France ordered mobilisation on 1 August. By way of response, “Stock exchanges panicked and many were closed.” But it was a bit late by then. As the saying goes, if you’re going to panic, panic early.

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What we do and why we do it

“We don’t get paid for activity, just for being right. As to how long we will wait, we’ll wait indefinitely.”

 

-       Warren Buffett.

In treacherous markets, it helps to have some core beliefs. The statement of investment intent most meaningful to us we first came across about 12 years ago. We make no apology for repeating it here. It’s contained within the late Peter Bernstein’s magisterial biography of risk, ‘Against the Gods’ (Wiley, 1998), which more or less tops our ‘required reading’ list for the engaged investor. It was the first time we came across the name Daniel Bernoulli, perhaps the first behavioural economist, who essentially said the following:

For a wealthy investor, the practical utility of any gain in portfolio value inversely relates to the size of the portfolio.

Or in plain English, if you already have a meaningful pot of capital, simply watch that pot. Bernoulli suggests, and recent award-winning behavioural financiers have proven, that most people are risk averse. We prefer gains to losses, for sure, but if we incur losses, the hurt tends to be felt twice as severely as the equivalent monetary gain. Since our clients are wealthy, our natural bias is to pursue capital preservation in real terms on their behalf. Capital preservation in nominal terms is easy, of course. We can just park our clients’ cash in a sound bank – if we can find one. But at an extraordinary juncture in market history, there are heightened risks even to sound banks, and there is, we believe, more than “usual” risk of a particularly unpleasant occurrence of inflation – indeed, a serious inflationary outbreak may be the only way of “resolving” the global debt crisis.

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Spoiler warning

“I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candour and a decision which the present situation of our people impel. This is pre-eminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today.. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.. In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone..”

 

-       From President Franklin D. Roosevelt’s Inaugural Address, March 4, 1933.

Just two years after ‘The China Syndrome’ lifted the lid on Spanish practices in the US nuclear industry, Jane Fonda and her production company, IPC Films, did a similar hatchet job on US banks with 1981’s ‘Rollover’. The Alan Pakula-directed film is certainly of its time (that is to say, paranoid and narrowly racist); environmental concerns have now segued into economic and financial malaise, with Arabs and their petrodollars as the enemy (if it could be remade today, and it probably couldn’t, the Chinese and the Renminbi would doubtless be replacing them). Investors with strong stomachs – and these days, that needs to be all of us – can watch the devastating final minutes here, as the US / global financial system is brought to its knees.

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