8 January, 2020

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.