“Imagine owning negative-yielding sovereign debt on a bankrupt state about to cancel their debt obligations when you can own double-digit dividend equities with PE’s under 15 paying out of free cash flow.” - Tweet from Capitalist Exploits (@capitalistexp), 3rd March 2021.
If you want to find out how the world really works, as quickly as possible, you essentially have two choices. One is to take a degree course in one of the more holistic social sciences – History, perhaps, or a multi-disciplinary hybrid such as the mixture of Politics, Philosophy and Economics that Oxford, for example, offers, and which is a favourite for any aspiring cabinet member. These days that will set you back over £30,000 in student debt, assuming you can fight your way onto the course in the first place. (This article points out just some of the associated downside risks.)
Another option is simply to play a computer game. The option this correspondent took as a teenager in the early 1980s was to splash out the princely sum of five pounds and buy a marvellous little game for the Sinclair ZX Spectrum called ‘Dictator’.
‘Dictator’, written by a former teacher, Don Priestley, for a company called DkTronics, is a masterpiece in cynicism and realpolitik masquerading as a computer game. (If you search online, the chances are you’ll find a ZX Spectrum emulator that will enable you to play a copy of the game for free.)
In it, you play the leader of a banana republic called ‘Ritimba’. The objective of the game is simply to survive for as long as possible. You start with $1 million. The longer you survive, the more dollars you accrue. This may sound easy, but it’s impossible to survive for long.
Each month you are presented with a demand from one of a number of interest groups. It might be from the army. Or from the peasantry. Or the landowners. Placate one and you will likely alienate another. You can’t please everyone. There’s also a force of guerrillas that wants to eject you from office and that are unlikely to do so nicely.
You might be asked to deal on behalf of a foreign lobby. You are next door neighbours with a country called ‘Leftoto’. There’s also the Secret Police, the Russians and the Americans.
How do you know whether and how much these various factions like you? The Secret Police will provide you with an optional monthly report that details your popularity, or lack thereof, with each of these various groups. But that report will cost you $1000. Lesson from ‘Dictator’ #1: There’s no such thing as a free lunch. Looking after ‘Ritimba’ has monthly running costs of $60,000. Lesson from ‘Dictator’ #2: Time is money.
Each month, you can try and please a group. Or you can try and please all groups (war with Leftoto is always a popular option, except with any peasantry that might get drafted).
Or you can try and ‘improve your chances’. Options here include increasing Secret Police powers; increasing your bodyguard; buying an escape helicopter; or ‘seeing to your Swiss bank account’. (This is a very cynical game.)
As each month goes by, your Treasury drains away, and pretty soon you will be reduced to asking either the Americans or Russians for ‘aid’ – which means you can then ‘see to your Swiss bank account’, whereupon your state assets will then halve, albeit to the credit of your foreign deposits. But as your fortunes with each of these pressure groups wax and wane, pretty soon some will join forces against you and agitate for revolution. Depending on a combination of a) luck and b) the hand you’ve played, either your escape helicopter will work, or you’ll hear the sound of automatic gunfire and the screen will turn black…
More recently, we’ve stumbled upon an even more impressive PC game series, Sid Meier’s ‘Civilization’. If you have young relatives and you’d like them to learn about things like history and particularly science without even being aware of it, ‘Civilization’ could not come more highly recommended.
‘Civilization’, like ‘Dictator’, is a turns-based game, but it’s taken the concept and sophistication of a social simulation to the Nth degree. Central to the game is the concept of the ‘technology tree’: each round, your advisors will ask you to investigate certain technologies, which will in turn require various resources. The sophistication of ‘Civ’ (as it’s fondly known to its many fans) is that each decision you make will have very specific consequences. Unlike the cheap and cheerful moral neutrality of ‘Dictator’, ‘Civ’ requires careful planning, and there are no quick fixes.
Let’s say you’re in the Medieval era, for example. (‘Civ’ takes you all the way from the Ancient era all the way through to the Modern/Atomic/Information eras.) At some point you will want to ‘own’ the compass, so that your forces can navigate. But you won’t get the compass until you’ve successfully researched Optics. And you won’t be able to research Optics until you’ve mastered Sailing.
Or let’s say you want to conquer rival kingdoms and you want to do so militarily. Discovering gunpowder before them will be a huge advantage. But you won’t get gunpowder until you’ve mastered steel. And you won’t master steel until you’ve mastered metal casting. And you won’t master metal casting until you’ve come to terms with iron working. It’s a little like chaos theory, but in reverse – every decision you make later in the game will be a function of those earliest technologies you chose to investigate. Small decisions made close to the start of the game have big implications further down the line.
We should add that every game of ‘Civ’ that we’ve ever played has lasted for hours. It’s enjoyable and hugely addictive. We bought a copy for our then ten-year-old niece because we thought it would be an excellent learning tool in disguise – but we have a sneaking suspicion that our older brother ended up playing it more than she did.
The overriding point about each of these simple-seeming games is that for all of their video-game simplicity, the actions you take in them have consequences. And some of those consequences can be very far-reaching indeed.
A system on the brink
When Lehman Brothers was on the brink in September 2008, the entire financial system hovered there on the brink right alongside it. If that sounds like hyperbole, bear in mind what JP Morgan CEO Jamie Dimon told his executive board, on the Saturday morning of the weekend that Lehman failed:
“You are about to experience the most unbelievable week in America ever, and we have to prepare for the absolutely worst case.
“Here’s the drill. We need to prepare right now for Lehman filing [for Chapter 11 bankruptcy protection]. And for Merrill Lynch filing. And for AIG filing. And for Morgan Stanley filing.”
There was a pause.
“And potentially for Goldman Sachs filing.”
Andrew Ross Sorkin, who published this monologue in his masterful account of the crisis, ‘Too Big To Fail’, adds:
“There was a collective gasp on the phone.”
There’s an interesting account from the perspective of Goldman Sachs, that same weekend. As investment bankers filed into the offices of the New York Federal Reserve for the fourth day in a row, a clearly exhausted and harried Goldman banker on the steps of the building told Lloyd Blankfein, the company’s CEO, “I don’t think I can take much more of this.” Blankfein’s response was withering:
“You’re getting out of a Mercedes to go to the New York Federal Reserve. You’re not getting out of a Higgins boat on Omaha beach.”
The then US Treasury Secretary Paulson had a choice that fateful weekend. As did the then Federal Reserve chairman Ben Bernanke. One choice was to let Lehman fail. But as soon as they realised how much damage that decision made to the global financial infrastructure of the time, they quickly mobilised their efforts – and hundreds of billions of taxpayers’ money – to circle the wagons around what remained of Wall Street.
Part of that decision-making progress was to drive US interest rates down to zero.
One very much doubts whether any of those protagonists would have expected to see US interest rates still at zero percent, twelve years later. Not that the largely self-inflicted lockdown disaster in response to what amounts to a rebranded flu outbreak has exactly helped..
Government debt historians remain somewhat coy over whether the UK Government, for example, has ever defaulted on its debt. The answer, to this purist at least, is that it has, and that it did so when it reset the coupon on its Great War debt from 5% to 3.5% in the early 1930s. The Financial Times takes up the story:
..The most famous argument for a debt jubilee is from John Maynard Keynes’ lambasting of the Treaty of Versailles, the contract designed to settle World War One reparations.
In The Economic Consequences of the Peace, Keynes called for a general forgiveness of debts for a war that had left the finances of Britain and other allies under strain. Most of the debt was owed to the US, which during the negotiations at Versailles argued against a cancellation of reparations. Instead, a large part of the burden was placed on Germany.
The British economist’s argument was that without a debt jubilee, an economic recovery would be impossible, and would plant the seeds for the next catastrophe. Debt overhangs tend to weigh on growth because money better devoted to government spending is spent on servicing the debt. A paradox of thrift can also arise, where government seeks to save as much as possible, which makes sense for its own balance sheet, but not for an economy left in tatters that requires aggressive State intervention.
Keynes’ view that governments would have to debauch their currencies to finance repayments proved grimly prophetic, with Germany in the 1920s undergoing a period of hyperinflation to finance its reparations:
“As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”
We do not know of a single financial market professional who believes that the global debt load is remotely sustainable, let alone repayable. It may be profitable to trade one’s way through the next financial crisis, and the one after that. We can only imagine how psychologically draining that would be. Instead, we are focused on ensuring that our investments have economic value as it is investments with no intrinsic value that suffer terminal and at times rapid decline during and following financial crises. The choice, to us, seems clear – as it does to ‘Capitalist Exploits’: own government debt, and put your faith in miracles , or own cash-generative real asset equities (with little or ideally no associated debt) and attempt to profit from what seem like a set of quickly approaching predicaments. When the rules of the game change, it makes sense to up your game.
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: email@example.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 and specialist managed funds.
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