Flying blind

“On quiet weekends, I often go to the Zurich airport for no reason at all. The big idea behind its development and operation is to be a destination in itself. There are shops, restaurants and much else to see. In fact, revenue from non-aviation related business is larger than what comes from flight operations. In my case, even when I travel, I walk through the airport with the eye of an owner—which I am. What sorts of stores have traffic? Is everything neat and tidy? Are the signs clear? Is there any visible unmet maintenance? Are the bathrooms clean? Are the standards of quality in bakeries and shops tip top? I also look around at the advertising which is a huge revenue segment. Who is advertising? What is being advertised? What is the manner of the advertisement? Does it all fit nicely together? And so forth.

“As an example, I noticed that in the last year or two, a big Swiss private bank has taken up most of the good advertisement spots on the arrival segment at Terminal A. The spots suggest, not so subtly, that the bank’s investment skills and judgment are as definite and absolute as those of an airplane pilot. A photo of a pilot in the cockpit of a big jet surrounded by a myriad of knobs and switches dramatizes the conceited hubris of it all. Unlike the idiotic advertisements of others who promise “not to rest” until “all my dreams and aspirations are met,” this pilot-investment skill analogy does not insist on insulting my intelligence. A new advertisement, I recently noted, had the same cockpit-knobs and switches photo with the tag line: Unexpected turbulence does not always require a seatbelt. What? Am I to think that the financial turbulence of our times is unexpected? More likely it is something unexpected by them.

“Alas, the analogy with clear air turbulence—a weather condition that is impossible to predict—fails miserably. Flying demands a seatbelt—mostly to protect oneself from oneself. In the old days bankers didn’t advertise. They didn’t need to. Their work spoke for itself. Perhaps those days will come again. In the meantime, I welcome all expensive advertising at the Zürich airport.”

– Tony Deden, manager of Edelweiss Holdings, December 2011.

What’s the scariest thing you can imagine about piloting an aircraft solo ? How about suddenly losing your sight at altitude ?

This is exactly what happened to the private pilot Jim O’Neill in October 2008, whilst flying his single-engine Cessna back home from Prestwick in Scotland to Colchester in south-eastern England.

While over northern Yorkshire, about halfway through his flight, O’Neill radioed a Mayday alert, saying he could no longer see his cockpit instrumentation. At first he thought his vision was being impacted by sunlight.

Air traffic controllers then noticed that his plane was descending, and turning.

RAF controllers initially tried to help the pilot land at an RAF base east of York, but after he failed to locate the base despite several attempts, they redirected him to the base at Linton-on-Ouse, 20 miles to the north-west.

The ‘New York Times’ picks up the story:

The Linton base’s chief flying instructor, Wing Cmdr. Paul Gerrard, already airborne in a Tucano single-engine aircraft used to train R.A.F. pilots, was directed to approach Mr. O’Neill’s plane and flew alongside him for more than 40 minutes at a distance of about 150 feet, Wing Commander Hynd said.

“He used his voice to guide him down by telling him to turn left and right, to lower the plane and to do his prelanding checks,” the commander said. “At very short range he still couldn’t see the runway, and it was only at the last minute that he could. He landed about halfway down and came to a halt just at the end.”

A tape recording of the exchanges between Wing Commander Gerrard and Mr. O’Neill was played at a news conference at the Linton base on Friday, as the R.A.F. began a weekend celebration of its 90th anniversary.

On the recording, the R.A.F. pilot could be heard saying, “Keep the nose down, keep the nose down,” as the two aircraft approached the runway.

“I’m really sorry about this,” Mr. O’Neill replied, as the R.A.F. pilot continued to coax him down. At low level, Mr. O’Neill repeated that he was still flying blind.

“I cannot see the runway,” he said.

“You should see it very shortly,” Wing Commander Gerrard replied. “It’s really nearly under your nose now.”

With his aircraft already over the runway, Mr. O’Neill finally confirmed that he could see it.

“I’ve got it now, sir,” he said. “Thank you.”

After a successful landing,  Mr. O’Neill was taken to hospital in Romford, near Colchester. It transpired that he had been blinded when a stroke caused an increase in pressure on his optic nerves. He subsequently recovered partial sight in one eye. At the time the story was published, there was hope that he might eventually regain sight in both eyes. His son Douglas reported that his father had sent a message to the RAF, thanking them for saving his life.

For most pilots, of course, “flying blind” never happens quite so literally. The expression “flying blind” dates back to World War II, when pilots were unable to locate the horizon because of darkness or cloud cover; they were forced to rely on what were invariably quite rudimentary navigational aids. Many became spatially disorientated (SD’d), experienced vertigo, and crashed. Even today pilots following instrument flight rules (IFR) are not immune from problems. The US Air Force investigated 633 crashes between 1980 and 1989 and found that spatial disorientation was identified in 13% of cases as a contributory factor. Pilots following visual flight rules (VFR), when experiencing weather conditions that require navigational instrumentation, have a life expectancy of less than three minutes.

But Houston, we have a problem. The single most important actors in the global financial markets, the world’s central banks –  well, they are flying blind. Having introduced the radical monetary policies of Quantitative Easing (QE) – the creation out of thin air of money that is then essentially gifted to the banking sector in order to buy government and now corporate bonds, and now in some cases equities, too – they have gone on to implement ZIRP (Zero Interest Rate Policy), and in many cases have followed that up with NIRP (Negative Interest Rate Policy). Now we have had monetary tightening, which has sent the yield on 10 year US Treasury bonds (for example) since 2020 from under 1% to over 5%, albeit with a brief current lull. Where and when will this insanity end ?

Criticising our central banks only gets you so far, in the same way that repeatedly banging your head against the wall only gets you so far. The mainstream financial media and our politicians aren’t listening. In many cases – the FT and The Economist one step forward, please – they have cheered on the central banks to the very echo. Merryn Somerset Webb recently observed that at an FT event at which she spoke, she was followed by the paper’s chief economics correspondent, Martin Wolf, who recommended banning cash altogether. We are surrounded by madmen.

So the critical question for all investors is: are you flying blind ?

That is to say, do you have an investment strategy for your life savings ?

Have you diversified your portfolio meaningfully across the available gamut of asset classes and investment choices ? (We endeavour to construct portfolios that we believe will hold up under more or less any kind of future financial market environment – including one of potential financial repression and capital controls.)

We are clearly entering a market environment and, for that matter, a geopolitical environment of acute uncertainty. Not just uncertainty in isolation – the future is always uncertain, and will often prove, after the fact, surprisingly benign – but threat, too. Honest question: have you ever been more fearful about your financial future, or that of your loved ones ? We haven’t. We thought at the time that 2008 would mark the nadir of any type of emotional response to market conditions. If anything, we are even more worried now. And it’s not blind panic, but simply the rational response to a financial environment in which those policy ‘masters’ are running out of magic tricks. There may be no more rabbits to be pulled from hats while the stock and bond markets adoringly applaud (or, more latterly, choose to puke). And as we approach the winter solstice, the tricks coming our way may be of a distinctly dark variety. Russell Napier, for example, has been warning of the reintroduction of capital controls for some time. In Argentina, they already got here. And in a possible ‘Keef’ Starmer government, for example, we may yet get to experience all the fun, thrills and spills of living in ‘Venezuela – but with drizzle’.

As the investment skies darken with chickens coming home to roost, don’t let your own ‘flight to safety’ be thrown off course by exogenous influences like the financial media. Remember, what we should now call the legacy media exist to emotionalise daily life. Recall the cautionary advice of Thomas Schuster of the Institute for Communication and Media Studies at Leipzig University, who has written probably the most damning indictment of the failings of financial media:

The media select, they interpret, they emotionalise and they create facts. The media not only reduce reality by lowering information density. They focus reality by accumulating information where “actually” none exists. A typical stock market report looks like this: Stock X increased because… Index Y crashed due to… Prices Z continue to rise after… Most of these explanations are post-hoc rationalizations. An artificial logic is created, based on a simplistic understanding of the markets, which implies that there are simple explanations for most price movements; that price movements follow rules which then lead to systematic patterns; and of course that the news disseminated by the media decisively contribute to the emergence of price movements.

Don’t let your long term investment plans be thrown into disarray by the siren songs played by clueless members of the commentariat. If in doubt, switch your TV or radio off and throw your newspaper into the bin. And don’t forget the equally valuable advice of Rolf Dobelli: Avoid News.

The beauty of a properly diversified portfolio approach is that you never have to market time. Within our own discretionary client portfolios, for example,

Gold and real assets provide us with a degree of portfolio insurance, inflation insurance and financial crisis insurance;

Systematic trend-following funds provide us with more of the same;

Unconstrained value equities provide us with the potential for attractive longer term returns, but without taking what we consider an unacceptable level of price risk, given potential geopolitical and economic developments.

And, almost regardless of how we feel about the financial markets, a blend of the investments and asset classes above – adjusted, of course, according to personal taste – enables us to be fully invested at all times without, we hope and trust, losing the facility to sleep well at night.

That word trust, again.

At the end of the day, a functioning civil society can only exist on the back of trust. Our friend, the fund manager and financial analyst Dylan Grice:

“At its most fundamental level, economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers. Since money is the agent of exchange, it is the agent of trust. Debasing money therefore debases trust. History is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects. Yet central banks continue down the same route. The writing is on the wall. Further debasement of money will cause further debasement of society. I fear a Great Disorder.

“I am more worried than I have ever been about the clouds gathering today. I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations.

“Next to language, money is the most important medium through which modern societies communicate,” writes Bernd Widdig in his masterful analysis of Germany’s inflation crisis, Culture and Inflation in Weimar Germany (2001). His may be an abstract observation, but it has the commendable merit of being true.. all economic activity requires the cooperation of strangers and therefore, a degree of trust between cooperating strangers. Since money is the agent of such mutual trust, debasing money implies debasing the trust upon which social cohesion rests.

“So I keep wondering to myself, do our money-printing central banks and their cheerleaders understand the full consequences of the monetary debasement they continue to engineer? Inflation of the CPI might be a consequence both seen and meas-urable. A broad inflation of asset prices might be a consequence seen, though not measurable. But what about the consequences that are unseen but unmeasurable—and are all the more destructive for it? I feel queasy about the enthusiasm with which our wise economists play games with something about which we have such a poor understanding..”

The Global Financial Crisis of 2007/8 showed that commercial banks cannot be trusted. That almost none of their employees went to jail showed that our political class and all its attendant lobbyists cannot be trusted. The ridiculous ‘Basil Fawlty-ish’ lengths to which our monetary authorities stretched themselves in the aftermath of the Crisis show that central banks cannot be trusted. The tortuous process of Brexit lifted a very broad and dismal veil, revealing that much of parliament, the news media, and the worlds of showbusiness, academia and Big Business (effectively, almost all of the so-called ‘Establishment’) cannot be trusted. The counter-Covid insanity did more of the same, only more loudly and with even more fascistic and technocratic intolerance.

When we take a commercial flight, we trust that the plane will be in good mechanical order, and that its pilots are sober, and fully trained to deal with any contingency that might realistically arise during the course of the flight. In the unlikely event that a plane crashes, the aviation ecosystem works exhaustively to uncover the reasons for the crash and prevent its reoccurrence.

What doesn’t happen is a pilot taking off into the unknown, with no maps, no support crew, no communications with ground control, not having checked his fuel gauge, and with literally no idea of his destination. (Central bankers, please take note.) But forget them. Have you completed your pre-flight checks ?

………….

As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:

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Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.

Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.