Market, Malthus & the Moneymen

Keynes is back in fashion. However, the most interesting things about Keynes is the man and what he did in ‘real’ world. Keynes made significant amounts of money for himself and the college endowment fund he managed mainly through successful stock selection. As the Financial Times noted after Keynes death: “[he] was one of the few economists with the practical ability to make money.” No less an investor than Warren Buffet has acknowledged his debt to the English economist.

Justyn Walsh (a former financial journalist, corporate lawyer and investment banker) in this fine book explores Keynes the investor. “Keynes and the Market” is a lively discussion of his investment activities and judgements. The approach is largely chronological interspersed with anecdotes (Walsh’s sharp journalist eye for a revealing story is evident) and analysis of the financial and investment logic underlying the bets that Keynes placed.

The book is at its best as a record of Keynes’ investing activities. Walsh seeks to argue that Keynes was a kind of ‘value investor’. In this, his argument is a little thin.

Keynes operated in a time and place where the nature of markets and opportunities were fundamentally different. The book identifies a number of sources of Keynes success – understanding market inefficiency, ability to be unorthodox and, most importantly, the luxury of holding onto positions for often an extended period allowing profits to be earned. Walsh highlights Keynes’ acute sense of the behavioral aspects of trading. In many ways, Keynes is probably the forefather of behavioral finance.

The greatest strength of Keynes the investor was his ability to reduce his financial knowledge into elegant aphorisms – Lord Beaverbrook, the English newspaper proprietor, observed that he made “exciting literature out of finance”. Keynes’ other strength is the fact that these aphorisms are as relevant today as they were in his time.

Keynes famously observed that investment is “anticipating the anticipations of others”. Bill Gross, founder of Pimco, one of the world’s largest investment managers, recently suggested that the best investment strategy currently may well be to buy whatever it is that the governments of the world will buy up next. The approach reflected the great man’s thinking.

George Magnus (2009) “The Age of Aging: How Demographics are Changing the Global Economy and Our World”; John Wiley & Sons

In 1798, in the “Essay on the Principle of Population”, Thomas Malthus predicted that that by the middle of the 19th century the growth in population would mean there would no longer be enough food to feed the population of the globe. The modern version of the survival argument is the challenge of “climate change”.

The financial equivalent of the Malthus thesis is that the aging of the global population creates massive financial challenges for governments and societies in providing for this non-working group. The effect of growing longevity and falling birth rates means that the average age of populations increases. This will result, based on current predictions, that in 2050 the world will have about 2 billion people aged over 60, three times as many as today - around 30-40% of the total population in the developed world and 25-30% in the developing world. The overall effect is that the working population will have to support a vastly increased number of dependants. The “demographic time bomb” argument is not new having been highlighted by the World Bank and others.

The author of the “Age of Aging” is George Magnus, a senior economic advisor to UBS Investment Bank (UBS formerly stood for United Bank of Switzerland but humourists now claim it means ‘Ugly Balance Sheet’ or ‘Used to be Smart’). The book is a well-researched analysis of the problem of “global graying”. It provides mind numbing statistics on the problem and some options for avoiding the worst of the problem such as expanding the work forces (through later retirement and greater female participation in the workforce) and higher productivity.

The book alludes to but is relatively inconclusive on a central issue – the need for individuals to save for old age and retirement. Over the last twenty years, governments have privatised retirement savings and also the investment risk of such schemes to a large degree. The Global Financial Crisis has devastated retirement and pension arrangements. Structural problems in these compulsory retirement saving schemes also abound. “Age of Aging” also does not cover, in any detail, the possible effects on asset prices, retirement poverty, availability and economics of old age health-care or intergenerational conflicts.

Perhaps as Thorstein Veblen observed: “The outcome of any serious research can only be to make two questions grow where only one grew before.”

Amielle Lake, Andrew Kakabadse & Nada Kakabadse (2008) “The Elephant Hunters: Chronicles of the Moneymen”; Palgrave MacMillan

In John Guare’s play “Six Degrees of Separation”, the central character, an art dealer, pursues an client hoping to sell him an expensive painting. The client is known as the “elephant” in the coded language of the dealer and his wife as they seek to stay focused on the hunt!

“The Elephant Hunters” seeks to understand what the authors see as an elusive sub-species of homo sapiens – homo financius. The book tries to work out answers to a variety of interesting questions: how money is made; why people get into finance; how the business operates; how do people cope with the stresses of the business. While the book provides some interesting insights, it fails to answer the questions it poses. It lapses too frequently into cliches – the “powerbitches” (powerful women). In the end, one is left wondering why finance and financiers look no different to any other business or an episode of the “Sopranos”.

The problem may lie in the fact that the authors rely on interviews. The authors do not appear familiar with or confident enough about the business to push their interviewees to elicit the “truths” they seek. We are left with a series of “homilies” and vague generalisations that are unsatisfying. The book seeks to turn anecdote into principle. For example, focusing of the philanthropic efforts of one individual tells us nothing beyond the “goodness” or “guilt” of any individual. The analysis does not grasp the complex tax issues between “giving” and “wealth preservation” that underpins some of this work and its dynamics. Nor does it provide an understanding of the status needs of powerful individuals.

Ultimately, the “Elephant Hunters” difficulty lies in its subject – the moneymen and moneywomen. They are simply not that interesting. Only people outside finance actually think they are interesting – one reviewer on the back covers waxes about: “the Moneymen and Powerbitches of high finance who hold all the levers in the engine room of contemporary capitalism”. The reality, as recent events have demonstrated, is vastly different. As John Kenneth Galbraith noted: “Nothing so gives the illusion of intelligence as personal association with large sums of money. It is also alas an illusion”.