Archive for the ‘Finance’ Category

Does a Dystopian Future Await?

Monday, March 23rd, 2020

Everyone is focusing on the numbers, of course.  The number of cases.  The number of hospitalizations.  The number of deaths.

And this new world of “self isolation” and “social distancing” and suddenly-empty grocery stores certainly has everyone’s attention.  Who knew a roll of toilet paper would ever be cause for such rejoicing?

Alas.  People are staring in the wrong direction.  While angst over the lack of N95 masks and hospital ventilators is reaching epic proportions, a beast slouches towards Bethlehem.

Not to make light of Covid-19.  It will probably kill millions before it’s done.  But its lethality is modest.  And we already have a model for how this will likely go… the Spanish Flu of 1918.

Like that long ago pandemic at the end of World War I, Covid-19 will exact its pound of flesh not from a terrible lethality, but rather from its remarkable infectiousness.  Infect enough people in a population and you don’t need a high mortality rate to suddenly be in a very dark place.

But that is only the prologue.

Mention economics and finance and people’s eyes quickly glaze over.  So let me distill it all down to a single, historically inarguable premise:  human health and well-being is directly correlated to GDP.  I don’t mean there’s some kind of vague, abstract correlation.  I mean they are directly correlated.

And GDP is now headed dramatically, profoundly lower.  Probably lower than we’ve seen in decades.  And probably for a very, very long time.

When this is all over, far more people will have died because of what is coming in the economy than ever died from Covid-19.  And the survivors will inhabit a landscape littered with carnage and misery that is today unimaginable.

There will be suffering aplenty, for everyone.

I know the eyes are already growing dim, so I won’t belabor the point.  But for those wondering why I pose such a depressing vision, why – those of you already turning and waving at the talking head on television who keeps talking about the “V-shaped recovery” – why can’t that be our future?

Let me put it this way… if we human beings had collectively led economically prudent, rational lives – sober is the word that comes to mind – the financial effects of Covid-19 would still be beyond awful.  

But, no, we didn’t live that sober, wise existence.  There is hardly a society on earth which has not lived beyond its means – far beyond its means – for years and years.  Global debt-to-GDP reached 322% in the third quarter last year, with overall debt north of $250 Trillion.

Debt doesn’t matter… until the day it does.  

Debt seems innocuous when interest rates are staring at the zero bound.  And that’s the lovely fantasy we’ve all been living since… well, a very long time.

Here is what will happen:  governments around the world will soon implement epic, extraordinary “stimulus” measures.  Corporations – those selfsame companies whose officers repeatedly rewarded themselves over the last decade by ordering share buybacks, in order to juice their stock price, in order to trigger their bonuses and amplify the value of their stock options… all in lieu of building factories, hiring workers, or otherwise doing something productive – will be bailed out.  

Banks, already the beneficiaries of a rigged system, will get even more rigging.

Small and mid-size businesses will get something, albeit they will be shunned to the smallest teat on the pig.

Individual citizens will receive helicopter money.  Who won’t love those checks in the mail?

Modern Monetary Theory, the notion that a government can essentially spend as much as it wants, unconstrained by such inconveniences as tax revenues or fiscal deficits, will have its day in the sun.

Interest on debt of all kinds will be suspended.  Loan payments will be delayed.

Everything you can imagine to keep the edifice upright will be tried.  Anything to keep the illusion alive.  To keep the dancers on the floor.  Politicians from both parties will promise anything and everything.

But, then, in spite of these herculean efforts…

Layoffs will come, slowly at first, but then with shocking speed.  Unemployment will spike to levels never before seen.

Interest rates will rise, even as asset values of nearly everything else collapses.

Companies will go out of business.

Banks will fail.

What remains of commerce will turn ever more slowly.

Currencies will fail. 

Social unrest will make its appearance.  We can expect police and military crackdowns.

Citizens will demand that government “do something.”  Socialism will be embraced by those who today cannot imagine themselves on that part of the political divide.

Ultimately, there may be a financial reset… with a new currency, new national and international monetary plumbing, and perhaps a debt jubilee. 

If you were alive in the middle of November, 1929, you’d surely have breathed a sigh of relief that all that chaos up on Wall Street a few weeks ago had turned around.  You’d have no idea, none at all, of the long nightmare that actually lay in front of you.

None of this will happen quickly.  This will be a long, extraordinarly painful slog.

But it was a reckoning we had coming.  Covid-19 is simply the dagger that began the dance.

The Break, When it Comes, Will Come Swiftly

Saturday, April 9th, 2011

2pm.  The sun is still high in the sky, only recently having begun its slow drift towards the horizon.  The heat and the humidity hang there like a blanket, seeming to hold the gray smoke that now drifts with a slow interminableness along the open fields.  The cannonading just finished, seeming to go on forever, has been the most amazing thing.  So many guns.  So much thunder.  So much fire and smoke.  Men on both sides marveled at it, knowing surely it was a prelude to something momentous.

Just east of Seminary Ridge, down in Spangler’s Woods, there is an awful, unspoken anticipation among the men lying in the shade of the trees, their stomachs empty because they had no appetite for lunch.  Even for an army proud of spirit, one now long-used to victory and with an unflagging belief in their commander, this thing seems an impossibility.  Peering out across the vast expanse of open ground  – nearly a mile – they are gripped by thoughts of how this thing must unfold.  They cannot escape wondering  of their own mortality.  Those who have caught a glance of Longstreet’s countenance cannot have been heartened.

And then come the orders.  The men stand quickly to arms, forming up in their regimental lines.  Standing shoulder to shoulder with their brothers and neighbors and friends, their bowels churning.  And suddenly they want to just be on with it.  To get it over with.

And so begins the long, terrible march.  My great grandfather is among them.


A hundred and forty-eight years later, we all know how it turned out, of course.  An unmitigated military disaster for the South, Pickett’s Charge gave proof that even the most exalted of generals sooner or later make a mistake.  They fall victim to their own hubris.  They are consumed once too often by their own confirmation bias.

With the benefit of hindsight, it is obvious to even the very least of military captains that Longstreet’s plaintive beseechment to Lee that “no fifteen thousand men ever arrayed for battle could take that position…” was utterly correct.

How was it then that Lee could have been so blind?  How could he fail to see a picture so utterly clear, one without even a hint of mystery or obfuscation?

Sometimes you just shake your head.


Indeed.  And so it is, yet again.  Markets turn on one thing more than any other… confidence.  The confidence which comes from a tomorrow that unfolds in a predictable arc, based at least loosely upon what happened today.  The days turn into weeks.  And the weeks into months.  And the months into years.  And after awhile there it is – the willful certainty of what the future holds.  We pretend we don’t know.  We tell others that we harbor no such belief, that we are as open to whatever the future might bring as is an eight-week-old puppy.  But in our heart of hearts, where the truth lives, the certainty holds its candle up high.  It is the monument upon which our hubris is built.

In something much less than a hundred and forty-eight years, people will look back upon us in wonder.  They’ll look at the landscape that lay before us, like we today do of that long-ago field in Pennsylvania, and shake their heads.

They’ll see the 1960’s and an American economic goliath attempt – unsuccessfully – to fund both a long, drawn out foreign war and a vast expansion of social programs at home.

They’ll see the 1970’s and the object lesson that came from that attempt.  They’ll see, notwithstanding the savaged economy that was part of that lesson, an increasing belief that economics had been mastered.  They’ll see the removal of the last vestiges of a gold standard.

They’ll see the 1980’s and the start of something strange called supply side economics.  They’ll see, written in the numbers, the first bump in the graph, the first bit of intellectual snobbery, the notion that debt doesn’t matter.

They’ll see the 1990’s and the beginning of two decades of economic malaise that would grip the world’s second most powerful economy.  They’ll see the rise of activism by central banks, an accelerating belief that economies can be engineered, that recessions no longer need be part of the picture.  They’ll see the curious transformation of a central banker from geek… to rock star.

At the dawn of the millennium, they’ll see it all pick up steam.    They’ll see the advances in communications and technology which suddenly ushered in a multi-generational labor arbitrage.  They’ll see free money and a flood of liquidity and the sudden strangeness of home values rising faster than wage rates.  They’ll see the odd, incestuous business model via which rating agencies make money.  They’ll see the unfettered explosion of unregulated derivatives, synthetic vehicles whose notional values dwarf the world’s real economies – yet which remain an opaque maze.  They’ll see leverage, everywhere, on a breathtaking scale.  They’ll see the loosening of regulations which allow banks to do pretty much anything they want.

More than anything else, they’ll see debt.  Debt everywhere.  They’ll see whole peoples, entire societies, who for two generations had lived beyond their means.  Who consumed more than they produced.

They’ll see the Euro and instantly see the flaws in its concept.  How it could not endure.

They’ll see the demographic tsunami that approached.

And then they’ll see the first cracks, the first fissures in the firmament:  Iceland, Greece, Ireland, Portugal, Spain.  They’ll see the rating agencies, newly chastened, floating sovereign ratings towards junk.

They’ll see broke states and broke municipalities.

They’ll see the largest bond fund in the world dump Treasuries.

They’ll see commodities reach generational highs.

From the periphery, they’ll turn their gaze towards the center, to the major economies of the world – and find it even worse.  They’ll look around for a bastion of sanity in the developed world – a single society that did not choose recklessness, one economy that was managed with prudence and care – and not find one.  They’ll look for the outrage and the opprobrium that ought to attend that fact, and find it scant.

In the end, they’ll look at the numbers.  The simple math behind it all.  The inexorable truth that lay before seven billion people, ignored.

And from that, more than anything else, they’ll shake their head.

The history will be clear to them.  The break, when it came, was sudden and swift.  Like an earthen dam crumbling away in a flood, inevitability made manifest.

It will be so obvious to them.  What they’ll wonder is how it could possibly have not been so utterly obvious to all of us.

And there will be no answer.

The Anti-Genius of Warren Buffett

Sunday, March 6th, 2011

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

– Warren Buffett


What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?

“Equities,” Buffett answers without a moment’s hesitation.

– Fortune Interview, October 19, 2010


Warren Buffett is my hero. There’s not a finance guy who has ever lived that comes close to him, in my book. If I could pick one person to have lunch with, Warren would be the guy.

But as hair-curling smart – to use Ben Stein’s phrase – as Buffett is, I think it’s important to understand where Warren’s strength lies. His enduring genius has always been his ability to understand the arcane numbers in a balance sheet, those circular references that so often elude others. He has always divined the nuance of underlying value. And his mantra of success has been simply to discover undervaluation, purchase it, and then to hold it long enough that its market valuation catches up with its intrinsic value.

No one has ever done it better.

Alas, we probably ought to be careful about ascribing that genius to everything else having to do with money.

Warren’s strength is not in managing companies, for instance. When he took over Salomon Brothers after John Gutfreund left in 1991, the results were less than stellar.  You’d think – and I’m sure Warren himself expected – that his fabulous expertise with numbers and finance would easily translate into him handily managing an investment bank.  Not so, as it turned out.  What Warren learned was that running the numbers of an asset – even an asset filled with people – was a very different proposition from the arcana of actually managing those people.  I suspect it sharpened his appreciation for guys who actually are good at that.

In a similar vein, I haven’t seen any evidence that Warren is particularly adept at judging the macroeconomic context we live in. Valuing a company is pretty far afield from judging sovereign risk or figuring out the implications of central bank behavior.


When my two boys were in their late teens I sat them down and gave them a couple-hour lecture – which they still, a dozen-odd years later, roll their eyes at – on basic financial literacy. Among other things, I wanted to convey the magic of compounding.  I wanted them to understand that earnest, regular saving will lead to an inflection point – a time when that pool of wealth of theirs will quickly begin to accelerate, the graph representing its growth moving swiftly vertical like a teeter-totter rising towards the sky.  It’s a lovely, amazing, wonderful thing to behold.

I also wanted to convey the flip side of that – that debt has its own inflection point. That there is a time when servicing a growing debt begins to become onerous.  The point where it, too, goes vertical – but this time an acceleration into financial oblivion. It’s an ugly, ugly thing, one from which few escape.


The macroeconomic climate is simply this:  We’ve reached that negative, debt-induced inflection point. Nearly all the major, modern economies have moved in lockstep to that juncture, holding hands as they walk towards the cliff.

To those who profess equanimity about the situation, I’ve long asked to hear a plausible scenario for unwinding the economic quandary we are in. Describe to me how this cannot fail to end up very badly.  Just show me the math.

I’ve yet to hear it. Not from anyone.

Not even from Warren.

And that’s why I’m long gold.

Of Hope and Hubris and Silver Wheaton

Friday, January 14th, 2011

Like clockwork, the alarm commences its buzzing at 4:25am.  The reason is because I live not far from the foothills of the Blue Ridge Mountains and work in Washington, DC.  If I waited any longer my easy one-hour morning commute would double into a mirror of the ugliness that is my evening penance.

But I’m not complaining.  I was once unemployed for fifteen months.  Spending three hours a day on the road isn’t so bad.

Life’s blessings come in many forms.  When I began to reintegrate with the workforce after that 15-month involuntary sabbatical, the thing that most struck me was the frenzied energy I felt all around me during that morning drive in.  Everyone was in such a hurry.  The feeling of it washed over me like a strangling, angry tide.  Seeking respite from it, I sought what quietude I could find.  I put my pickup truck in the slow lane and kept the radio off and tried to find a measure of calm within my own thoughts.  And so it was that my daily trip up I-66, years on now, has been my own regular soliloquy.

Walking out of the Foggy Bottom Starbucks just a couple blocks from my office, first coffee of the day in hand, my eyes sweep down New Hampshire Avenue.  It’s the very same view I see every morning – a lazy, still-dark city only yet beginning to stir.  The construction workers are walking up the street, their breaths blooming in front of them on this cold January day, and I nod as I climb back in the truck.  In two minutes I’ll be in a warm office.

Turning the key, my mind drifts backward.  It wasn’t all that long ago – really just a spit in the wind – that much of the city was just a miserable bog.  No wonder the man after whom it was named wanted to go back to Mount Vernon after only two terms.

And before that… the mental images spin backwards like one of those old black-and-white newsreels, until it quickly runs out of film and the screen goes white.

To a man with maybe three score and change given, two millennia seems like such a grand sweep of time.  But if you lift your thoughts and squint at it, you quickly realize it’s not.  No, the march of the Roman legions and the dusty streets of Jerusalem and that first Easter really weren’t all that long ago.

And before that, add in just a few hundred years more and you’ve watched Alexander do his thing and the Greeks start to see the world in a different way and the Persians invent a whole bunch of stuff.  There’s that little tete-a-tete at a place called Thermopylae.

And then it all gets misty and mysterious.  Add in another couple of millennia – back to the age of that Ice Man they found a few years ago up in the Alps – and suddenly there’s most of the whole nut.  Nearly everything man has accomplished – the utter transformation of the planet – has happened across a measly five thousand years.

There’s your bull market.  The backdrop to everything.

Which is why I smile when people joke about me being a doom-and-gloom kind of fellow.  Nothing could be further from the truth.  It’s just that I recognize the hubris that also frequently attends our otherwise impressive rise from the marshes and the caves.  Our beneficent ascension has not been an unbroken line.

I’m the first one in the office.  I start the coffee and settle down at my desk.  Pulling up Outlook, I quickly scan my inbox.  Thankfully, there are no crises yet.  I can concentrate on the reports and meetings that await me later in the morning.

The hours pass quickly.  At ten o’clock I take a quick break and log onto Fidelity.  The buy order for a thousand shares of Silver Wheaton I put in last night was executed.  I nod, satisfied with the price.  Added to the thousand shares I bought on Monday, that gives me just enough stake in Sonny’s favorite company to make it interesting.  Just a little gambit.

I wrestled last night with where to put the limit.  Just like I did on Monday.  Just like, it seems, I do with every position I’ve ever bought.

Until I remembered half a dozen years ago.  Mentally debating the entry price of my first gold position and anguishing over fifteen bucks – the difference between $435 and $450.  In the fullness of even just a handful of years, how can you not laugh at that?  And so, shaking my head at the memory, I just plugged in fifty cents over the closing market.  Just to cover against one of those flash things.

Long before Sonny coined his “Trade of a Generation” moniker, I made basically the same call, labeling mine “The Financial Bet of a Lifetime.”  I like Sonny’s description better.  Seems to have a hint of cultured gravitas to it, whereas mine sounds rather more like a craps game your alcoholic brother-in-law would be playing back in the alley.

But same difference.  After twenty years of being a hundred percent in equities, fully bought into the notions of long-term-buy-and-hold and stocks-never-lose-in-the-long-run, I began to see things that gave me pause.

It was hard at first.  A secular equities bull is perhaps the loveliest thing in all finance.  It makes you feel like a genius.  Letting go of it must be something like what addicts endure when they knock on the door at the rehab center.

I succeeded, though.  Over a few months I pulled everything out and went to cash.  Treasuries, where I could find them.  And then, after that, slowly, I began to think about gold.

The first step into a pool is the hardest.  After that it gets easier.

Years on now, 75% of my investment portfolio is gold.  No miners.  No leverage.  Just plain old bullion.

I know, I know.  That’s just insane.

And so, of course, the last thing I need is a middling position in a silver streaming company.  Especially one that brings a fair bit of leverage and volatility to the table.

But you know what?  People don’t change.  You can read any of those ancient texts, those earliest bits of written insight into our forbears, stretching back across those five millennia, and it’s all there.  All the wonders that we people bring.  And all the foibles.

The financial landscape is one we’ve seen before.  I won’t say I know with certainty what the exact details will look like.  Or the exact timeline.  But I do know what the endgame will be.  I know that with absolute certainty.  It will rock our world.

I know saying that sounds incredibly arrogant.  Like I’ve been blessed with some sort of omniscience or something.  That’s not it at all.  It’s just a math problem.  Not a particularly hard one.

And then that too shall pass.  Gold will blow up.  As will Silver Wheaton.  And maybe then, finally, we can get back to another one of those lovely secular bulls in stocks.

I surely do miss it.

Where Are the Experts?

Tuesday, May 19th, 2009

Probably the aspect of finance and economics that I find most disheartening is the dearth of critical thinking that usually accompanies the subject.  You might expect that among lay people, of course.  But with people who work in the field?  You’d think, understanding all those arcane subjects, that they’d be able to bring to bear a degree of intellectual rigor.  That they’d question the dogmas, challenge the assumptions, and ultimately arrive at their own conclusions.

That they’d be better at this money stuff than the rest of us, in other words.


Here’s a link to a story from last weekend’s New York Times titled “My Personal Credit Crisis”.  Written by Edmund L. Andrews, an economics reporter for the paper, it’s a self-effacing account of how even those who are supposed to be experts in this genre… still got it very wrong.

Lest I paint with too broad a brush, I’ll point out that this was/is purely a personal saga – it showcases the credit card and mortgage mistakes that Mr. Andrews and his wife made.  It’s not about investment advice.  And it wasn’t like he was suggesting that all his readers do the same.

But it surely does make you wonder…

“My Personal Credit Crisis”