“Money talks – and mine said ‘Goodbye !’”
—
Get your Free
financial review
—
As regular readers will attest, we have long approvingly cited the work of the late Albert Bartlett, emeritus Professor of Physics at the University of Colorado at Boulder. Professor Bartlett regarded sustainable growth as a contradiction in terms, and voiced at least two startling opinions on the topic:
“The greatest shortcoming of the human race is our inability to understand the exponential function.”
And he asked,
“Can you think of any problem in any area of human endeavour on any scale, from microscopic to global, whose long-term solution is in any demonstrable way aided, assisted or advanced by further increases in population locally, nationally or globally?”
Such views are unfashionable, of course (although some have referred to them as fashionably declinist) – we are somehow meant to believe that perpetual growth is not just desirable but essential, and that the planet can cope with an infinite number of people despite its obviously finite resources.
The problem with the perpetual growth fantasy is that when the world has accumulated so much debt that its major economies are incapable of growing even at a rate sufficient to service that debt, not only does the growth dynamic run into reverse, but the debt deflation dynamic ensures protracted and painful economic contraction.
Size – in politics or common currency blocs – is not automatically a good thing. More to the point, as JP Morgan’s Michael Cembalest once pointed out, there is disturbingly little “commonality” amongst the disparate cultures that make up what we used to call the European common market, for example.
The chart below shows DNA mappings of European citizens (courtesy of “Correlation between genetic and geographic structure in Europe?” Current Biology Magazine, August 2008). While genetic variations were relatively small, those variations were tied very closely to geography.
As Mr Cembalest points out, by grouping similar DNA results together, we get something that looks very much like a map of Europe – a map that reflects “hundreds of years of migration, weddings, funerals, births, language, values passed to children, circumstances that call for charity, sacrifice, revenge and everything else that define ‘culture’.”
`
(Source: JP Morgan Chase & Co.)
In Cembalest’s words, “The map shows clear patterns of ancestry tied to geography, which is perhaps why the EMU was designed to retain the region’s fiscal, economic and cultural identities. Perhaps we should not be surprised that Northern Europe is struggling with whether it will mortgage its future to save the South.”
Cembalest asked, crucially, whether the “will” is even there. “In terms of shared experiences and values measured by anthropologists, and the contours of history implied by genetic research, they may not have enough in common. It took almost 150 years for the US to reach the same point in its history, when it began to cede more control to a Federal, centralized government.”
Another avowed euro sceptic, before the fact, was Leopold Kohr. Kohr was an Austrian Jew who only narrowly escaped from Hitler’s Germany just before the war. The village in which he was born, Oberndorf in central Austria, with a population of just 2,000 or so, would – in its lack of size – come to play a crucial role in Kohr’s thinking.
Kohr graduated in 1928 and went off to study at the LSE with the likes of fellow Austrian thinker Friedrich von Hayek. In 1938 he decided to leave Europe for America, and despite being told it would take two years to get the appropriate documentation and book a passage, managed the feat within a week.
He would make North America his home for the next 25 years.
In September 1941 Kohr wrote the first part of what would become his masterwork, ‘The Breakdown of Nations’, arguing that Europe should be “cantonized” back into the sort of small political regions that had existed in the past and that still persisted in places like Switzerland. “We have ridiculed the many little states,” he wrote sadly, “now we are terrorized by their few successors.”
The essence of ‘The Breakdown of Nations’ is the problem of scale. Size matters. As Kirkpatrick Sale writes in his foreword to the book,
“What matters in the affairs of a nation, just as in the affairs of a building, say, is the size of the unit. A building is too big when it can no longer provide its dwellers with the services they expect -running water, waste disposal, heat, electricity, elevators, and the like- without these taking up so much room that there is not enough left over for living space, a phenomenon that actually begins to happen in a building over about ninety or a hundred floors.
“A nation becomes too big when it can no longer provide its citizens with the services they expect – defence, roads, post, health, coins, courts and the like – without amassing such complicated institutions and bureaucracies that they actually end up preventing the very ends they are attempting to achieve, a phenomenon that is now commonplace in the modern industrialized world.
“It is not the character of the building or the nation that matters, nor is it the virtue of the agents or leaders that matters, but rather the size of the unit: even saints asked to administer a building of 400 floors or a nation of 200 million people would find the job impossible.”
In the words of Albert Bartlett,
“Continued growth past maturity for any entity becomes obesity or cancer.”
Kohr shows that there are unavoidable limits to the growth of societies. As he puts it, “social problems have the unfortunate tendency to grow at a geometric ratio with the growth of an organism of which they are a part, while the ability of man to cope with them, if it can be extended at all, grows only at an arithmetic ratio.”
In the real world, there are finite limits beyond which it does not make sense to grow. Kohr argues that only small states can have true democracies, because only in small states can the citizen have some direct influence over the governing authorities.
When asked what had most influenced his political and social ideas, Kohr replied:
“Mostly that I was born in a small village.”
Professor Bartlett’s thesis was that mankind’s biggest failure is our inability to understand the power of the exponential function. The exponential function describes anything that grows by a fixed percentage over time. He uses the example of bacteria growing in a bottle. At 11 o’clock the bottle is empty, bar one bacterium. By 12 o’clock the bottle is full. The doubling time – the time it takes for the bacteria to double in number – is a minute. He then asks: at what time is the bottle half full ?
The answer may surprise you: at just one minute to mid-day.
What applies to bacteria in bottles also applies to the human population on our planet and to the world’s natural resources. And to government debt.
Contrary to popular belief and widespread political deception, the world has seen no great deleveraging since the financial crisis.
And debt is a tricky asset class. While it constitutes an asset to the holder, it is clearly a liability for the issuer, who has every incentive under the sun to devalue it. That conflict of interests is bad enough. It is made worse by the fact that ‘investment’ in debt is conducted almost exclusively by institutional players – fund managers who, at a personal level, have little or no skin in the game, and who conduct their investment operations almost entirely in obedience to the illogic of bond indexation, whereby the largest components (i.e. countries) within a (sovereign) bond index are the most heavily indebted and therefore least creditworthy issuers of that debt.
Bastiat, with his celebrated ‘broken windows fallacy’, showed that what we think we see is often dwarfed by the impact of things we cannot see and in some cases cannot even begin to understand. The tectonic plates of the global debt market are now shifting, in what will become some very uncomfortable ways, that are likely to hugely imperil the capital of bondholders, creditors and others not necessarily directly linked to the bond market at all.
The very role of bonds in 2023 has become hopelessly distorted. This is an asset class historically associated with the generation of income and the preservation of capital. Inflation is now endemic and interest rates so politicised that the purpose and function of bonds in an investment portfolio no longer has any validity.
Matterhorn Asset Management’s Egon von Greyerz sounds the alarm:
“In 1913, total US debt was negligible, and in 1950, it had grown to $406 billion. By the time Nixon closed the gold window in 1971, debt was $1.7 trillion. Thereafter the curve has become ever steeper.. From September 2019 when the US banking system started to crack, the Repo crisis told us that there were real problems although no one wanted to admit it. Conveniently for the US government, the Repo crisis became the Covid crisis which was a much better excuse for the Government to print unlimited amounts of money together with the banks.
“Thus, just in this century, total US debt has grown from $27 trillion to $94 trillion!”
Jeffrey Tucker of the Brownstone Institute goes further in his criticism of central banking:
“The Federal Reserve was essential to making the pandemic response possible. It stood ready to monetize every dollar Congress spent to subsidize the lockdowns and boost spending of the entire public-health hegemon. It was so essential that on March 15, 2020 – two days after the declaration of emergency and one day before the Trump administration’s lockdown edicts – it actually eliminated reserve requirements for banks completely. In other words, it abolished a core regulatory practice that had restrained money creation for more than 100 years. The result was a $6.5 trillion printing spree.
“The bank crisis caused by dramatically increased interest rates – a policy designed to arrest the inflationary consequences of the Fed’s accommodation of the Covid regime – has destabilized regional banks and centralized banking operations. In the background is the stated intention of the Biden administration to reform the whole system using a Central Bank Digital Currency that creates a path for a China-style social credit system of universal control.
“The only solution is sound money but we are getting further from that by the day. The competent advocates of pro-freedom reforms are few and far between. The economists largely failed during the lockdowns to speak out for their discipline and knowledge. Now they are as captured as any other profession.”
To us the conclusion is clear. If you cannot understand the game, then do not play the game. The rational investment answer lies not in overvalued credit and debt markets but in undervalued equities, especially those linked to commodities, including gold and silver, which cannot simply be printed into existence by baffled monetary authorities. High quality and ‘value’ commodity-related stocks seem, to our way of thinking, to be just about the only game in town that is really worth playing any more. Opportunities for profitable capital growth certainly exist, but most investors are looking in entirely the wrong places.
………….
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:
Get your Free
financial review
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 and specialist managed funds.
“Money talks – and mine said ‘Goodbye !’”
—
Get your Free
financial review
—
As regular readers will attest, we have long approvingly cited the work of the late Albert Bartlett, emeritus Professor of Physics at the University of Colorado at Boulder. Professor Bartlett regarded sustainable growth as a contradiction in terms, and voiced at least two startling opinions on the topic:
“The greatest shortcoming of the human race is our inability to understand the exponential function.”
And he asked,
“Can you think of any problem in any area of human endeavour on any scale, from microscopic to global, whose long-term solution is in any demonstrable way aided, assisted or advanced by further increases in population locally, nationally or globally?”
Such views are unfashionable, of course (although some have referred to them as fashionably declinist) – we are somehow meant to believe that perpetual growth is not just desirable but essential, and that the planet can cope with an infinite number of people despite its obviously finite resources.
The problem with the perpetual growth fantasy is that when the world has accumulated so much debt that its major economies are incapable of growing even at a rate sufficient to service that debt, not only does the growth dynamic run into reverse, but the debt deflation dynamic ensures protracted and painful economic contraction.
Size – in politics or common currency blocs – is not automatically a good thing. More to the point, as JP Morgan’s Michael Cembalest once pointed out, there is disturbingly little “commonality” amongst the disparate cultures that make up what we used to call the European common market, for example.
The chart below shows DNA mappings of European citizens (courtesy of “Correlation between genetic and geographic structure in Europe?” Current Biology Magazine, August 2008). While genetic variations were relatively small, those variations were tied very closely to geography.
As Mr Cembalest points out, by grouping similar DNA results together, we get something that looks very much like a map of Europe – a map that reflects “hundreds of years of migration, weddings, funerals, births, language, values passed to children, circumstances that call for charity, sacrifice, revenge and everything else that define ‘culture’.”
(Source: JP Morgan Chase & Co.)
In Cembalest’s words, “The map shows clear patterns of ancestry tied to geography, which is perhaps why the EMU was designed to retain the region’s fiscal, economic and cultural identities. Perhaps we should not be surprised that Northern Europe is struggling with whether it will mortgage its future to save the South.”
Cembalest asked, crucially, whether the “will” is even there. “In terms of shared experiences and values measured by anthropologists, and the contours of history implied by genetic research, they may not have enough in common. It took almost 150 years for the US to reach the same point in its history, when it began to cede more control to a Federal, centralized government.”
Another avowed euro sceptic, before the fact, was Leopold Kohr. Kohr was an Austrian Jew who only narrowly escaped from Hitler’s Germany just before the war. The village in which he was born, Oberndorf in central Austria, with a population of just 2,000 or so, would – in its lack of size – come to play a crucial role in Kohr’s thinking.
Kohr graduated in 1928 and went off to study at the LSE with the likes of fellow Austrian thinker Friedrich von Hayek. In 1938 he decided to leave Europe for America, and despite being told it would take two years to get the appropriate documentation and book a passage, managed the feat within a week.
He would make North America his home for the next 25 years.
In September 1941 Kohr wrote the first part of what would become his masterwork, ‘The Breakdown of Nations’, arguing that Europe should be “cantonized” back into the sort of small political regions that had existed in the past and that still persisted in places like Switzerland. “We have ridiculed the many little states,” he wrote sadly, “now we are terrorized by their few successors.”
The essence of ‘The Breakdown of Nations’ is the problem of scale. Size matters. As Kirkpatrick Sale writes in his foreword to the book,
“What matters in the affairs of a nation, just as in the affairs of a building, say, is the size of the unit. A building is too big when it can no longer provide its dwellers with the services they expect -running water, waste disposal, heat, electricity, elevators, and the like- without these taking up so much room that there is not enough left over for living space, a phenomenon that actually begins to happen in a building over about ninety or a hundred floors.
“A nation becomes too big when it can no longer provide its citizens with the services they expect – defence, roads, post, health, coins, courts and the like – without amassing such complicated institutions and bureaucracies that they actually end up preventing the very ends they are attempting to achieve, a phenomenon that is now commonplace in the modern industrialized world.
“It is not the character of the building or the nation that matters, nor is it the virtue of the agents or leaders that matters, but rather the size of the unit: even saints asked to administer a building of 400 floors or a nation of 200 million people would find the job impossible.”
In the words of Albert Bartlett,
“Continued growth past maturity for any entity becomes obesity or cancer.”
Kohr shows that there are unavoidable limits to the growth of societies. As he puts it, “social problems have the unfortunate tendency to grow at a geometric ratio with the growth of an organism of which they are a part, while the ability of man to cope with them, if it can be extended at all, grows only at an arithmetic ratio.”
In the real world, there are finite limits beyond which it does not make sense to grow. Kohr argues that only small states can have true democracies, because only in small states can the citizen have some direct influence over the governing authorities.
When asked what had most influenced his political and social ideas, Kohr replied:
“Mostly that I was born in a small village.”
Professor Bartlett’s thesis was that mankind’s biggest failure is our inability to understand the power of the exponential function. The exponential function describes anything that grows by a fixed percentage over time. He uses the example of bacteria growing in a bottle. At 11 o’clock the bottle is empty, bar one bacterium. By 12 o’clock the bottle is full. The doubling time – the time it takes for the bacteria to double in number – is a minute. He then asks: at what time is the bottle half full ?
The answer may surprise you: at just one minute to mid-day.
What applies to bacteria in bottles also applies to the human population on our planet and to the world’s natural resources. And to government debt.
Contrary to popular belief and widespread political deception, the world has seen no great deleveraging since the financial crisis.
And debt is a tricky asset class. While it constitutes an asset to the holder, it is clearly a liability for the issuer, who has every incentive under the sun to devalue it. That conflict of interests is bad enough. It is made worse by the fact that ‘investment’ in debt is conducted almost exclusively by institutional players – fund managers who, at a personal level, have little or no skin in the game, and who conduct their investment operations almost entirely in obedience to the illogic of bond indexation, whereby the largest components (i.e. countries) within a (sovereign) bond index are the most heavily indebted and therefore least creditworthy issuers of that debt.
Bastiat, with his celebrated ‘broken windows fallacy’, showed that what we think we see is often dwarfed by the impact of things we cannot see and in some cases cannot even begin to understand. The tectonic plates of the global debt market are now shifting, in what will become some very uncomfortable ways, that are likely to hugely imperil the capital of bondholders, creditors and others not necessarily directly linked to the bond market at all.
The very role of bonds in 2023 has become hopelessly distorted. This is an asset class historically associated with the generation of income and the preservation of capital. Inflation is now endemic and interest rates so politicised that the purpose and function of bonds in an investment portfolio no longer has any validity.
Matterhorn Asset Management’s Egon von Greyerz sounds the alarm:
“In 1913, total US debt was negligible, and in 1950, it had grown to $406 billion. By the time Nixon closed the gold window in 1971, debt was $1.7 trillion. Thereafter the curve has become ever steeper.. From September 2019 when the US banking system started to crack, the Repo crisis told us that there were real problems although no one wanted to admit it. Conveniently for the US government, the Repo crisis became the Covid crisis which was a much better excuse for the Government to print unlimited amounts of money together with the banks.
“Thus, just in this century, total US debt has grown from $27 trillion to $94 trillion!”
Jeffrey Tucker of the Brownstone Institute goes further in his criticism of central banking:
“The Federal Reserve was essential to making the pandemic response possible. It stood ready to monetize every dollar Congress spent to subsidize the lockdowns and boost spending of the entire public-health hegemon. It was so essential that on March 15, 2020 – two days after the declaration of emergency and one day before the Trump administration’s lockdown edicts – it actually eliminated reserve requirements for banks completely. In other words, it abolished a core regulatory practice that had restrained money creation for more than 100 years. The result was a $6.5 trillion printing spree.
“The bank crisis caused by dramatically increased interest rates – a policy designed to arrest the inflationary consequences of the Fed’s accommodation of the Covid regime – has destabilized regional banks and centralized banking operations. In the background is the stated intention of the Biden administration to reform the whole system using a Central Bank Digital Currency that creates a path for a China-style social credit system of universal control.
“The only solution is sound money but we are getting further from that by the day. The competent advocates of pro-freedom reforms are few and far between. The economists largely failed during the lockdowns to speak out for their discipline and knowledge. Now they are as captured as any other profession.”
To us the conclusion is clear. If you cannot understand the game, then do not play the game. The rational investment answer lies not in overvalued credit and debt markets but in undervalued equities, especially those linked to commodities, including gold and silver, which cannot simply be printed into existence by baffled monetary authorities. High quality and ‘value’ commodity-related stocks seem, to our way of thinking, to be just about the only game in town that is really worth playing any more. Opportunities for profitable capital growth certainly exist, but most investors are looking in entirely the wrong places.
………….
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:
Get your Free
financial review
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 and specialist managed funds.
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