Debt, Austrians and Investment Strategy

I recently found myself reminiscing about the capital market doommongers of the past 30 or 40 years (my favourites are Ferdinand Lips, erstwhile Rothschild Zürich, the great Gold prophet of the late 70s and 80s and Bob Prechter of Elliot Wave fame who got it right once in 1987. Both ended up living in caves (metaphorically) eating baked beans and nuclear winter rations, having been made to look exceedingly foolish by subsequent events) and reflecting on how very dangerous it is for reputation, mental health and net worth to be a bear in a world of monetary expansion and how extraordinarily difficult it is to get the timing right.

The past year has seen an increase in my intake of literature critical of the current monetary and of the debt culture that appears to have infested itself into every nook and cranny of our western (or G8) culture. I have revisited (with growing joy, it has to be admitted) the classics from the Austrian School – Mises, Rothbard, Schumpeter and Menger, I have connected with an erudite, critical and intelligent community “FinTwit” community on Twitter, from Jim Rickards to Morgan Housel and Tim Price, who are not backward in coming forward with their harsh criticism of the current regime and I have enjoyed regular broadcasts from Grant Williams and his team at RealVision TV whose interview guests tend towards the skeptical and the critical of the sustainability of the status quo, amongst many others. At the same time, I have found myself increasingly unable to swallow much of what passes for economic commentary from the traditional sources – from the Economist, whose demise into a woke economics cheerleading rag is heart-breaking, the FT and most of the mainstream commentariat.

As a result I am currently unsure of whether I have manoeuvred myself into an echo chamber of a clique of like-minded value investors who can see clearly that we are in „Fergie time“ and thus close to a cataclysmic popping of the Everything Bubble (including money) or whether the current narrative (dangerously close to the end of the Everything Bubble, so man the life-boats) is now the popular view and therefore discounted? My view is coloured strongly by a moral conviction that what we have now (broken money, punishment of savers, risk free reward for insiders etc) is simply wrong and possibly even evil at a societal level, so what I think will happen and what I believe should happen (to purge the system of moral turpitude) are conflated at the margin. The technocratic disregard of the concerns and values of the saving classes personified in the ghastly Ms. Lagarde‘s most recent comments disgust me personally.

The question, as always, is what to do in times of great uncertainty and possibly at bifurcation points of historical dimensions, a point I have made elsewhere with reference to the need – borrowing from Howard Marks of Oaktree Capital – to “move forward, but with caution”.

My own view is that

a) looking for bargains is the only sensible way to shop for anything, but especially when you are shopping for capital replacements (ie things to swap your hard earned dosh into). As Seth Klarman said (sort of) either you get that off the bat or you never get it (“Margin of Safety”).

b) I like to be as close to the source of original cash production as possible, next to the spigot as it were. That means buying businesses in their entirety or at least as much of them as needed to ensure that the decision as to who gets to decide where surplus funds are allocated is indisputable (that would be me);

c) Owning more than one business, preferably in different industries is a pre-requisite for not getting involved at an operational level. Do that and you are dead in the water (well, I would be). Not being involved operationally is a pre-requisite for making rational decisions about where and how to reinvest cash flows or not, unless you are that rarest of creatures, an operationally brilliant generalist capital allocator – I have met exactly two in my life and I know for a fact that I am not one of them;

4) If you can‘t find a good new business to buy, your choices are between fractional ownership of a good public company (violating rule b) or buying a franchise of a well run and proven business and putting a manager in to run it. I happen to love the second path, but am happy to take the first one if we find ourselves in Christmas or Summer sale environment.

5) I look at gold as a currency and a genuine store of value or perhaps more accurately as an undated call option on everything. In ancient times (pre 2000) when cash and equivalents had a time value represented by an interest rate, gold, with its real cost of carry was a hard call to make, but today it is – as our US friends might say – a doosy (not sure if you spell it that way, but you get my drift). As John Butler writes most eloquently in his book “The Golden Revolution revisited” “All purely fiat currencies eventually fall to their intrinsic value of zero.” ALL – when the price of money falls to zero or less, then that would in my simple view of the world tell you all you need to know about the value of it.

6) Even if the rate of interest is nominally at zero (-ish) that rate is only available to insiders in the crapitalist system. SMEs and non-investment grade businesses are still paying 5-10% for access to capital (if it is available at all). Consequently secured lending on reasonably liquid productive assets (rolling working capital financing) is extremely lucrative and a great source of investment income available to everybody (no matter how small their capital base) if they are prepared to do the legwork – disintermediation is already at work in the digital world with crowdfunding just starting to scratch the surface of its possible applications. I would hate to be running a bank balance sheet in this environment, with the piranhas nibbling away at my raison d’eire in increasing numbers everyday (and there is nothing more painful than having your raison d’eire nibbled at).

7) Finally, I believe the days of easy returns and brainless investing are over for this era. Returns in the next era (which has already started and is overlapping the old one) will only be available for those with real business and commercial skills (not the parody of performance skills masked as commercial skills so visible in our large concern leaders and their minions). Ben Graham had a bit to say about that in Chapter 20 of the Intelligent Investor, of which I will write more another time.

The End of the World (as we know it)

Here is a question I have been pondering: does a social system or political economy based on free markets and (capitalism) automatically result in unbridled consumerism and all the consequent ills of trivialisation, egotism, debt, and debilitation of our natural environment and morals? Or is the current mess we are in the result of some specific conditions of this particular strain into which what we still think of as free market capitalism has mutated.

I think I have been asking this question in some for or another for decades, but I am asking it with a greater sense of urgency now as I look at the voting patterns of the younger half of society in the UK in last week’s General Election and realise that, if the statistics are to be believed, the majority of under 45s in the UK would have preferred a socialist, categorically anti-capitalist party and leadership for their country than the conservative alternative.

This despite the fact that nobody is quite sure what sort of ‘conservative” this Conservative government is going to turn out to be, apart, that is, from the obvious signs that it is certainly NOT going to be moving the state leftwards along the Rahn curve or much further rightwards on the Laffer curve. Capitalism must indeed have an appalling reputation if over half the young population of an advanced western economy with an hitherto unheard of level of prosperity would prefer a model whose outcome in past live experiments has reliably ended in penury and serfdom, let alone the trashing of those individual liberties the younger generations esteem highly and take for granted.

Also feeding in to this need to ask and answer the question are the concerns of the environmentalists, particularly the many thoughtful and sensitive thinkers – from Terry Patten to Joanna Macey to name just two – who reflect openly on the damage being done to our souls and societies by the current environment and our societal priorities. In a recent interview in the beautifully produced austrailian magazine Dumbo Feather, Joanna Macey, author of Coming Back to Life, refers to Prof. Jem Bendell’s “Deep Adaption” paper in which he states that “Currently, I have chosen to interpret the information as indicating inevitable collapse, probable catastrophe and possible extinction.” , having explained what he means by each of those terms in the previous chapters. He goes on to state

Unfortunately, the recent years of innovation, investment and patenting indicate how human ingenuity has increasingly been channelled into consumerism and financial engineering. We might pray for time. But the evidence before us suggests that we are set for disruptive and uncontrollable levels of climate change, bringing starvation, destruction, migration, disease and war.” Jem Bendell, “Deep Adaptaion” (IFLAS Occasional Paper University of Cumbria 2018)

and

The West’s response to environmental issues has been restricted by the dominance of neoliberal economics since the 1970s. That led to hyper- individualist, market fundamentalist, incremental and atomistic approaches. By hyper-individualist, I mean a focus on individual action as consumers, switching light bulbs or buying sustainable furniture, rather than promoting political action as engaged citizens. By market fundamentalist, I mean a focus on market mechanisms like the complex, costly and largely useless carbon cap and trade systems, rather than exploring what more government intervention could achieve. By incremental, I mean a focus on celebrating small steps forward such as a company publishing a sustainability report, rather than strategies designed for a speed and scale of change suggested by the science. By atomistic, I mean a focus on seeing climate action as a separate issue from the governance of markets, finance and banking, rather than exploring what kind of economic system could permit or enable sustainability.” Jem Bendell, “Deep Adaptaion” (IFLAS Occasional Paper University of Cumbria 2018).

It occurs to me that there are two apocalyptically inclined groups of thinkers from, I suspect, diametrically opposed ends of the political spectrum currently formulating their eschatological hypotheses, namely the environmentalists and, for want of a better basket to put them in, the “sound money” proponents from the Austrian School of Political Economy. Both are predicting collapse and/or catastrophe in the short to medium term, although the sound money school don’t appear to have a view on the extinction option, possibly deeming it outside of their sphere of competence. Both schools see the “capitalist” model of society as it is currently evolved as the root cause of our problems and both have deep thinking traditions that stretch back into the late 19th century (although both would claim that their philosophies and world views can be traced back for hundreds if not thousands of years).

I have no understanding of climate science and have absolutely no idea whether the statistics bandied about claiming to validate one or other side of the argument are real or not. I am as deeply suspicious of the claims of big industry and their lobbyists that the whole thing is a hoax as I am of big government using highly selective data to increase the size of the state, impose draconian regulatory systems and increase the tax burden. Common sense and observations of the natural world around us tells us that our current trajectory is not a happy one. Our cavalier attitude towards the natural resources we have been gifted as attested to by litter on the streets, oceans full of plastic, food that contains no nutrients, animals tortured and pumped full of antibiotics and hormones, landscapes denuded and scarred, will not be without consequence for us. How could it be otherwise?

I am on firmer ground – as a christian libertarian with thirty years or more of business and finance experience – when it comes to the proximate causes of our economic malaise and this, I think is where we will find the surprising confluence of these two rivers of thought. In the island formed in the middle of the meeting of these two rivers there is ample room for an exchange of views and solutions between the two experts and their common calculation that the end is nigh and that our systemic demise will not be pretty.

The problem for both camps is money. The environmentalists abhor the profit only motive of multinational corporations: As Joanna Macey says: “ What’s scary to me is that corporations only have one variable they seek to maximise: profits and that is both toxic and time-limited….And when you get a system driven by one single variable .. it cannot stay in balance, it cannot self-correct.” That may or may not be true of all corporations generally, but it is undoubtedly true that when money (or capital) is placed at the centre of the value creation system then its unlimited demand for (and ability to) scale, soon drive all other considerations to the very edges of the organisational focus. The tidal wave of cheap capital sloshing around the system and available primarily to the largest of institutions (banks, multinationals, governments and their agencies) is the key issue behind our burgeoning environmental stress, not the nature of capitalism itself.

Simply put, we have allowed too much money to be created out of thin air by a fractional reserve banking system deeply in cahoots with a rapacious state which derives its mandate from promises that it can neither finance nor keep that go well beyond the power of the working (tax paying) population to fulfil. This status quo is then dogmatically defended by an increasingly authoritarian elite of technocrats espousing a high octane mixture of deeply flawed economic principles loosely based and selectively cherry-picked from John Maynard Keynes’ postwar and post depression-era recipes.

The policy environment in which we have been living over the past 50 years (longer if you want to extend the period of monetary irresponsibility back beyond Nixon’s severing of the US-$’s convertibility to gold in 1971) is neither liberal nor capitalist: it is a technocratic pseudo-liberalism or clientele capitalism (crapitalism being my preferred epithet) which becomes ever more statist and reminiscent of a centrally planned economy as it becomes entangled in the web of its own inherent contradictions.

Pretty much every ill we can observe in our society can be traced back to the increasing levels of what Ben Hunt and Rusty Guinn, in their excellent Epsilon Theory essays, have come to call the financialisation of our political economy and, by extension, lives. Excessive amounts of money produced by central bank fiat at an exponential rate are metastasizing and consuming the whole body politic – there is something rotten in the state of Denmark and the rot goes to our very core. It turns citizens into debt slaves, companies into insatiable, sociopathic forces of destructive, governments into the handmaidens of oligopolists and the environment into a refuse dump.

Crapitalism in this advanced stage of the disease is a direct consequence of a 50 year era of profligacy in which ‘higher and faster’ dictated the direction and priorities of a society whose entire existence is predicated on the belief that endlessly borrowing from tomorrow to finance today is somehow a sensible way to conduct its affairs.

The environmentalists see the consequences for our planet, it’s resources and our mental and physical health and enlist the help of a dour 16 year old swedish girl to write their Mene Tekel on the wall of the carousing babylonians. The sound monetarists – the Austrians – have no such spokesgirl, but use the statistics of monetary expansion, out-of-control debt creation and broken money to tell their story for them. (A story by the way that nobody is really listening to except possibly the Remnant – you know who you are.) Both camps recognise the simple truth that if something cannot go on for ever, then it will stop. One side wants the state to do more, the other wish the state would do considerably less, secure in the conviction that more state hardly ever produces the innovative technical solutions and competition of ideas which have so far secured our continued prosperity. One side believes we are heading for extinction preceded by collapse and catastrophe. The other side recognises the danger of collapse and of severe distress, but does not claim to envisage any apocalyptic scenarios beyond the demise of the current broken monetary system.

Those in power seem happy enough to embrace, encourage and highlight the increasingly hysterical extinction psychosis of the environmentalists, using them as a vehicle for an expansion of their sphere of regulation and interference (witness the ECBs recent public ruminations on the idea of expanding its remit to include climate change management), whilst dismissing out of hand and ridiculing the concerns of the sound monetarists (whist at the same time building up the largest stores of physical gold in its vaults ever witnessed). It seems to me though that the thoughtful proponents on both sides would benefit from talking to each other much more than they do in order to foster the four Rs of Prof. Bendell’s “Deep Adaptation”: Resilience, Relinquishment, Restoration and Reconciliation and work together dismantling the crapitalist system before – well, at least after – its inexorable collapse.