Investing lessons from Anthony Deden

Seven lessons from an independent thinker

Most of us, when we’re younger, we want to believe the authorities. We want to believe the rating agencies. We want to trust government statistics or authorities of all sorts. It happens, as you grow older… where you become convinced that they all lie and everything is phony and everything is false. And I mean everything. Everything.

Anthony Deden

I’ve always had somewhat of a knack at assessing the contours and frameworks of any subject matter I delve into, and an even more pronounced knack at recognizing the misfits and revolutionary thinkers in a field.

On the one hand you have the good thinkers who are trusted sources of information on the currents of a field. These are the people that you can learn the ropes from, the people who give you the coventional details and who can outline the territory to you.

Then you have the great thinkers, the ones who shift the paradigm, the ones who stand alone outside any conventional path carved up by the rest. These thinkers are lantern-bearers wading into the unknown, lighting the way for the rest of us.

Anthony Deden is a great thinker. Listening to Deden is like rewiring your brain to think on an unconventional paradigm. I hope to write many articles in this ‘Investing lessons’ series and I’m grateful this is the man I’m starting with.

Anthony Deden: The man behind the mind

Deden has had an unconventional trajectory within investment management. Born in Greece, he spent a few decades in America and wasn’t particularly involved in finance. He was gently thrusted into this world by a mentor, many years his senior, who recommended him to a family that needed investment advice.

It seems that Deden began as some form of an investment advisor and began to take things more seriously as time went on. One family slowly became two, which became three, until he was a fully fledged investment advisor without training. According to Deden, he ‘had to learn a great deal by the sheer desire to do the right thing.’

This attitude of doing right by these families was born out of a concern that he was essentially dealing with the lifetime savings of an entire family. This is all the wealth this family has and will ever have. Deden realized the nature of capital: irreplaceable. You must respect capital and recognize its irreplaceability in order to avoid errors that would put the family out of business.

The only goal was to avoid ruin.

He wasn’t exposed to equities in the crash of 1987 so was able to deploy a lot of capital during the years that followed. Deden understood his ignorance in the field and erred on the side of inaction wherever he could. Learning as much as he could from friends in New York, or by reading the great value practitioners such as Graham, Dodd, Buffet, or even by reading the Austrian and classical liberal traditions in economics, Deden was interested in fundamental questions on the nature of money and interest rates.

He gradually arrived at the realization that most conventional conceptions on matters bear no relation to reality. So when it came to the nature of risk and portfolios, he valiantly declared the mundane musings of the industry as nothing more than nonsense.

For Deden, ‘risk was the idea of losing your capital permanently with no ability to ever recover it.’ Which is why he changed his entire framework and then explained to the families he was serving that his new single investment policy is simply protecting, enhancing, and deploying the capital permanently. He explained that there had to be some time horizon with a purpose for long-term deployment of the capital.

The Eden of Deden

Anthony Deden embodies his investment philosophy in his character. Sitting calmly with the Swiss Alps sprawled across the background in a world where time seems frozen, subtly reflecting the permanence of his investments and his ideas.

There are three pillars to Deden’s thoughts:

  1. Scarcity
  2. Permanence
  3. Independence

These three ideas are the core of his oeuvre at his investment holding company Edelweiss Holdings Ltd, woven into the fabric of every position and every thesis Deden commits to.

1. Scarcity

Scarcity is a foundational ‘law’ in economics. You know the story: there are a finite amount of resources on this great planet of ours and there are ever-increasing populations with a seemingly unlimited list of desires. This finiteness of resources and its contrast with the infiniteness of man’s desire creates scarcity.

Even before the birth of the disciplines of moral and political economy and economics in the past few centuries, thinkers, and humans generally, have always contended with the question of scarcity. Thinking about it, scarcity is at the root of the fundamental questions of civilization. The struggles of man arise from the insurmountable forces of supply and demand, which rest on the bedrock of scarcity.

Deden succinctly describes it as ‘no one can have all that they want’. Scarcity exists not only in tangible assets, but in the very intangible too. A good example of this is that one great and precious commodity that we so unwittingly spend: attention. Attention is scarce and every business is vying for our attention. The scarcity and finitude of attention is what makes it so valuable.

So for Deden and, in fact, for the rest of the investing ranks scarcity is key. Scarcity is a driver of value itself: find scarcity and you have found value. Deden gives the example of art. What makes a painting as valuable as it is? Surely not the canvas, nor the paint? It’s the fact that there’s only one.

‘So scarcity, in all of its permutations, is an important ingredient in any action that deploys capital for the future’, Deden teaches us. When thinking of where to deploy your capital you don’t want to park it anywhere. Your aim should be to find a business which is involved in something scarce, a business that is unique, producing something that is unique, and the best in the world at what it does.

One method of finding scarcity is analyzing supply chains and breaking them apart. Deden gives a masterful example: a lot of people like whiskey, but a lot of people make whiskey and even whiskey bottles and even the glass that the whiskey bottles are made of. No scarcity there. But how many people make the machine that makes the bottle itself? Scarcity is found by hunting for scarcity.

This idea of scarcity is intertwined with the ideas of barriers to entry and moats in a business. Deden refuses to invest in a company that is involved in activities with low barriers to entry even if they have a brand. You want scarcity in technical expertise and position in the market, you want scarcity in the position the company occupies in the supply chain, you want scarcity of the type of goods and services. That way, the business builds a large moat and puts up impossibly colossal barriers to entry, and you and your capital can rest safe knowing this company that you have chosen is in a blue and clear ocean, free from the bloodlust of other sharks.

2. Permanence

I didn’t fully appreciate the idea of permanence and endurance until I heard Anthony Deden talk about it. I began to think of investments not only in the time horizon of a single lifetime, namely mine, but began thinking about building intergenerational wealth that will stand the brute force that is the future.

When Deden invests, he’s thinking lifetimes ahead.

The affinity to permanence stems from the idea that it is easier to make money than it is to keep it: the irreplaceability of capital. Deden began looking at investments he owned in companies that had been around for over a century and started searching for the reasons that had allowed them to survive crises from war to inflation. Exactly what are the ingredients that allow a company to survive time?

An example he gives is of an investment in a traditional French barrel making company, the complete opposite of the latest growth tech stocks we’re all piling into nowadays. Deden likes this business because it is not sexy, he knows they are the best at what they do and have been doing it for a long time. Being ‘only’ a quarter of a billion in size and only recently expanding operations internationally, they will be around half a century from now and will grow a few times in size in that long time horizon, all the while they will be making the same high quality barrels using trusted techniques that have passed the test of time.

These businesses are not chasing growth and leveraging their balance sheets. They’re simply the best at what they do. There is a certain scarcity in their skillsets and an enduring quality in their business.

What if growth was not the only metric that mattered, but endurance and permanence were the real goals?

Deden admits that permanence is ultimately an illusion that we chase. The key to investing in these enduring companies is finding robustness and antifragility. Borrowing from the great Nassim Taleb, Deden recognizes not only the importance of adaptation for survival, but the importance of being able to gain from disorder: antifragility.

Scarcity and permanence are qualities that you have to cultivate. A company only survives one hundred years by adapting to the times and benefitting from the vagaries of the ages.

A key factor in cultivating this robustness and permanence is knowing that the people who own and run the business are responsible, knowing that they have the best interests of the business at heart. In our hyper-financialized world where the machinations of management mean that the upbeat of the company ticker is all that matters, finding people who simply want to do the best job they can is what it is all about.

3. Independence

Scarcity and permanence in a company also arise from having a certain independence. There are two streaks of thought to explore here: independence in the business you want to invest in, and independence in yourself from the rest of the financial world.

Deden’s investing philosophy functions via negativa or as he terms it: the principle of exclusion, which is to say that he focuses more on what not to invest in than what to invest in. By ruling out thousands of possibilities, he’s left with a few dozen companies that fit his strict criteria. But because of his strict criteria, he knows he’s found diamonds amongst the dirt.

A good example is his lack of enthusiasm for transport companies, whether airlines or trains, because these companies have no operating leverage. Being right at the end of the consumer supply chain means that they are subject to inputs and costs that are beyond their control, such as mercurial government regulations.

These businesses lack the vaunted independence that Deden craves. If you are going to put your irreplaceable capital somewhere, it better not blow up at the whim of some third party.

The people who run this company should demonstrate a hgh level of faithfulness to the business. And if Deden finds a series of actions that are not in the best interests of the business, he will quietly walk away from the entire investment.

This kind of independence in the supply chain and independence in business allows you to sleep at night, and it makes life simpler. You’re not worrying about what’s happening in this industry, or what deals were made there, or the advent of some new regulations or events. The business you have chosen is reliably in control of what it does, and is reliably in demand at the root of the supply chain.

You want a business on which a row of other businesses are dependent, so that if this business was to fail it would cause a domino effect, collapsing an entire supply chain. That way you know what this business does is so crucial that failure is a remote probability and the entire industry has a vested interest in this business staying afloat. But most importantly, it’s got evergreen demand.

Will your business stay standing once the market crashes?

An example Deden gives is a chemical company that produces polymers. Nothing to shout about. But this company has operating margins unheard of in the industry. The company also solves problems no one else is solving nor did they ever think to solve them. One of their products is the little exciter that goes into airbags in automobiles around the world. Boring product, necessary demand, great investment.

4. The trouble with prosperity

Independence doesn’t only matter in your choice of investment, but in yourself and your philosophy as well.

Deden has completely detached himself from the larger financial world with all its illusory hustle and bustle. In Deden’s mind the financial industry has failed in its sole responsibility of protecting the wealth that clients have spent a lifetime accumulating. So deep is his detachment from the world of finance that he always emphasizes the difference between an economic and financial cause or agent, always pointing out that finance is not the economy.

Deden laments the start of this era in which actual productivity and industrial activity took a backseat in being the driver of the economy, being replaced by finance. He pins the beginning of this age to some time around the mid to late 90s.

Monetary policy has always played some role in financial matters but something happened wherein monetary policy became the driver of the economic engine. Prices of securities began an ascent independent of underlying economic realities and activities. This new epoch began in the United States, and, as always, the rest of the world followed along.

Interestingly, Deden lays some of the blame here on private equity:

‘Private equity’s nothing other than regular equity that’s leveraged. Because of the ability to borrow unlimited sums to buy unlimited things, and their ability to turn them over, they’re able to pay prices in the marketplace for businesses that are perhaps higher than the owners think they’re worth. Their business is to extract substance out of such companies and get rid of them. Their business is to make money from their security. This has distorted the market’s ability to find, to discover, true value in terms of price. The price discovery is really distorted immensely on account of both monetary experimentation as well as the moral consequences of such policies among economic actors.’

Once prices became detached from reality he began to think that there must be some sort of giant mistake. It had to be one massive prank. Doubting himself, he thought maybe the world had changed forever and he was stuck in his old ways. Maybe he was rigid and the world was sane. Deden went soul-searching.

He stumbled upon the answer through vigorous soul-searching and retracing of steps and looking for direction. This then led him to write a speech for his clients with a title borrowed from James Grant’s book: ‘The Trouble with Prosperity’. Realizing, with the help of that book, that there was this apparent prosperity the causes of which must be examined. ‘Unless you examine its causes, you don’t know to what extent it is real or it is an illusion’.

He goes on to draw a bleak picture: if you gave me your American Express card and I then go on a massive shopping spree, I can buy all this stuff and show off and people will think I’m deeply rich because I have all this material stuff. I’m wearing nice clothes, driving a nice car, I’m even contributing to GDP! But, as my previous article showed, indicators of economic trouble are interlinked. Excessive credit and stagnant wages in seemingly moderate waters was one of the drivers of the 2008 Global Financial Crisis.

The trouble with prosperity is that prosperity can be a mirage.

Deden became convinced that in an era of quantitative easing the system was going to destroy the nature of money itself. The rules had changed. ‘When the rules change, the basic framework with which you make decisions needs to change’. People think pre-2008 was normal, but the ills of financialization were rampant even pre-2008.

As Warren Buffett has famously remarked, when there is rampant greed and things begin to get out of hand, be fearful. Deden exhorts us to examine the causes of booms, and to examine the very framework in which we’re operating and adjust our rules accordingly. When the game changes, we must also change.

This is an esoteric lesson. Just because all ships are heading in a certain direction it doesn’t mean it’s the right way. Think for yourself and examine your assumptions and the assumptions of the millions who make up the ‘market’. That’s cliche by now, but for Deden it is completely natural to begin with pure scepticism. His thought process is ‘something has got to be wrong here’. Begin with the assumption that everything is fake. Everything. All sources of media and information are lying to you. Now, what do you do?

5. Exclusion: tuning the noise/signal ratio

As I mentioned, Deden operates from his principle of exclusion. There was once an age not long ago when you would have wanted all the information you could get a hold of in most matters in life and the markets. Information was in itself scarce and took serious effort to finely collect and curate.

The trouble of our age is that we have access to too much information. The inversion of this problem began once mass communication and the internet were created. Ours is a problem of abundance and so our goal is to block out the noise as best we can, to filter out the nonsense and the irrelevant.

Our epistemological sieves need fine-tuning.

So what you do is work from a first principles approach and really try and see the underlying scaffolding behind reality and the markets. Deden will seek out reasons not to invest in something.

It’s not necessarily important to always be looking for opportunities. What is important is to acquire an understanding so that you can recognize the opportunities when you see them. If there is an opportunity, it comes across for everyone to see, but very few people recognize it. So the people that recognize it are prepared to recognize it.

Deden explains that you will need understanding of the business, the sector, and the market. This takes an immense amount of time and effort and it’s rare that you’ll come across a real opportunity, but you must keep learning to ready yourself to recognize opportunities and filter out the noise.

Filtering out the noise comes in many forms. For example, Deden talks about EBITDA (an accounting construct: earnings before interest, tax, depreciation, amortization). ‘EBITDA is not traditional. The only reason EBITDA is around is on account of the ability to finance acquisitions to credit. Were it not for credit creation, there wouldn’t be an EBITDA.’

He always refers things back to how an actual business owner would think about things and points out the absurd nature of the idea, for example, that an owner of a business would think in terms of certain multiples and so on.

‘We think of industries in financial terms now rather than think of the industries themselves. What is the business? Who are the customers? That’s been turned completely on its head. We now look at: What are the earnings per share? What are the forecasts for the next twelve months?’

When our illusions begin to suffocate us, always go back to concrete reality. These statistical constructs are not always useful. Look at the business and look at the owners of the business and think not of owning shares, but having participations in the business. Get some skin in the game. If it was your money, would you do anything different?

‘I think that what’s missing in our world is this ability to have tools with which to think about the economic value of a business endeavor rather than its financial value. It’s easy to say, “This company sells for X number of dollars a year,”. What’s difficult is to say, “What is this company worth, and why?”‘

Deden’s focus eventually became businesses that are real and independent of the financial world. He also tuned out any news and chatter from the financial world after realizing that there is a massive distinction between an owner of a business and an investor. He explains, after purposefully extracting himself and his team from the financial world, that this extraction and exclusion causes your mindset, your vocabulary, your philosophy, and your practice to change. Everything changes.

This point applies to all fields but even more so to finance. Consensus and mimesis will largely shape not only the way you act, but the way you think, and most importantly, the way you imagine and your conception of what’s possible and what’s necessary. By truly freeing yourself from the anchor of the endless babble of online posts and media heads, you can begin to reflect on constructing a portfolio that has permanence at its core.

6. Portfolio construction

Portfolios have a purpose and every asset within that portfolio has a purpose. You must make portfolios with purpose. Each asset is there for a reason.

Deden unapologetically declares that the way the financial industry markets portfolio construction is a farce. Sitting down with a client and asking them what their risk tolerance is and balancing a portfolio based on that. This is an exercise in futility. Clients don’t usually have the correct definition of risk to begin with.

Risk is ruin. If we accept the definition that risk is simply permanent loss of capital (it’s the only metric that really matters) then portfolios and the assets within them should be geared towards permanently deploying and enhancing capital.

He compares modern methods of diversification to an automobile manufacturer who whilst making a car declares that X% of the car should be made of steel, Y% should be made of glass, and Z% should be made of some other material, for example. It’s nonsense. The proportion of materials in the car should be constructed and fine-tuned to fulfill the purpose for which the car is being made.

In this sense, each of Deden’s investments has a purpose in relation to his larger portfolio, and in and of themselves. Any business he invests in engages in some meaningful activity, in some meaningful sector, providing meaningful goods and services to the market. A row of these meaningful ‘participations’ (i.e. investments), as he terms it begin to make up a portfolio which itself has some purpose, made out of assets that have been selected for a purpose.

This mode of being wherein everything has some purpose may seem slow in the short-term, but that’s the point. It’s a marathon of deliberation, not a sprint for burning out. When you’re thinking in generations, it’s the surest method to flourish.

7. Gold

Gold is the perfect metaphor for Deden’s ideas and temperament. It’s real, it’s permanent, it’s scarce, and it’s independent.

Deden holds around 35% of his portfolio in gold which is then deployed to an investment in the rare chance that something gets past his highly-tuned filter. Gold has served mankind for thousands of years as a place of refuge and so it is more real than anything that can be printed on demand. He jokingly states that gold, in terms of a P/E ratio, has P but no E. For Deden it is purely a storage mechanism and he doesn’t care whether the price goes up.

‘I own it because, had I not owned gold today, I would own treasury bills, I would own short term commercial paper, I would own cash deposits and other such things to provide me liquidity because I think that roughly about 60% of our capital is permanently invested. 35% of [our capital] is in gold and is liquid. I want it liquid so I can exchange it for participations like the one we have in the future at some point.’

‘And I think any good investment operation, particularly if it involves irreplaceable capital, must have embedded in it a source of continuity and substance and reserves. So, some years ago, I would not hesitate to buy treasury bills, commercial paper, short term bonds, time deposits. But I have come to believe that virtually all of those things I just mentioned, they’re actually debt.’

When you deposit money in a bank, it becomes a liability of the bank. They don’t hold it in their vault. Buying a treasury bill is buying somebody’s debt, yet it is called an asset. Bonds are debt. Deden decided he wanted his liquidity to not be someone else’s liability. Liquidity should be an asset.

Taking this into account, and taking into account the three pillars of Deden’s thought, it’s inevitable that he would have such a large holding in gold:

  1. Gold gives him scarcity.
  2. Gold has permanence and has served man for thousands of years.
  3. Gold gives him independence from the financial system. No debt. Just assets.

Deden states that they own around three tons of gold and at one point, it was more gold than some of the central banks of the world owned. He takes pleasure in knowing that he possesses financial strength that not even central banks do. Since gold is not a claim or a promise on anything. He can physically hold it and store it, and sell it.

Gold is real.

The nature of gold is in complete contrast to Bitcoin which he avoids because he doesn’t know what it is. If he can’t see it or understand it, and because it is so new, Deden can’t consider it as part of the permanent portfolio that he has pledged he would construct to perpetuate the wealth of his clients.

By understanding the nature of gold, you begin to understand Deden’s mind. And like gold, there will always be some people who think not in decades, but in lifetimes and generations.

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Currents through an Economic Crisis

Five indicators that make an economic crisis

Do you have any idea what you just did? You just bet against the American economy. Which means, if we’re right, people lose homes, people lose jobs, people lose retirement savings, people lose pensions. You know what I hate about banking? It reduces people to fucking numbers.

The Big Short

Brad Pitt’s character in the movie adaptation of Martin Lewis’ The Big Short spews out the above jeremiad in one of the most sobering scenes of the movie (if you haven’t watched it already, then watch it as soon as you finish reading this article).

In the scene, novice investors Charlie and Jamie have just made the deal of their lifetimes shorting AA tranches of CDOs of MBS using CDS. What that alphabet soup means is simply that they bet against people being able to pay their mortgages since banks indulged in predatory lending and gave out mortgages to people they knew couldn’t afford them. Ratings agencies then slapped good ratings on these debts which were, in fact, risky.

Whilst basking in their newfound investing prowess and celebrating their imminent multi-millionaire status, Brad Pitt’s character reminds them that if they’re right about impending doom on the global financial stage, a lot of people will suffer.

Let’s explore what makes an economic crisis and how we can tell through five specific economic indicators, especially in light of the two crises that my generation has now lived through early on in their lives: the Global Financial Crisis of 2007-2008 and the current Covid Crash.

Let us not forget that behind all this abstract talk and data lies the visceral experience of living, breathing humans. When we see the statistic of unemployment rising X%, what that information doesn’t convey is the uncertainty, anxiety, and hardship a lot of people will face just having lost their jobs and not being able to sufficiently provide for themselves and their families.

I hope if there are some good things that come out of this site and my financial career in the long-term that it is allowing people to take control of their financial lives to fully live a life of their choosing, making us all a bit more antifragile to financial madness, and for us to be able to funnel capital for the net positive of human society and create productive people, assets, and businesses for the betterment of life.

What is an economic crisis?

Economics isn’t a science,1 and so there is no objective measure as to what technically constitutes an ‘economic crisis’.

The word ‘recession’ has now become synonymous with the word armageddon, where we have a conditioned response to think of doom any time we hear the word. There is no technical consensus on what constitutes a recession or an economic crisis (these terms are used at times interchangeably, and at times separately, with ‘recession’ relating more to GDP), with definitions ranging from the deterioration in specific key indicators such as GDP, unemployment, living standards, and income for a specific timeframe, to more straightforward definitions such as a decline in GDP for two consecutive quarters which is used by many British economists.

There are certain popular and reasonable indicators that we can use to ascertain the health of the economy and the finances of the people within that economy. Since the economy is fractal, organic, and complex (of the Mandelbrot kind) no two economic crises are alike, and indicators can only tell us so much. Indicators in a complex system like the economy can interact on different scales of the economy, causing larger and compounded effects to emerge in the macroeconomy. The economist Jan Tinbergen, who was one of the founders of econometrics, recognised this by suggesting multicausal theories born from an interplay of causes.

A Mandelbrot set, showcasing the nature of fractals.

Economic crises, recessions, and depressions2 can differ in geography, sectors, length, and depth. However, the more interconnected the world becomes through hyperglobalization, the more uniform these effects become, to the extent that in response to the crash of 2008 countries had to co-ordinate economic policy together because of how integrated the global economy is. This hyperglobalized world has many advantages for businesses and consumers, but also leads to extreme fragility, since an economic contagion3 in one node of the system can more easily bring other nodes down. In other words, we are more exposed to systemic risk.

When looking at economic data and indicators, it is necessary to think about the second order effects of an event. If unemployment rises, your mind should then immediately begin to think what effect that will have on businesses which will sell less since people are not earning money, and so on.

Let’s take a look at five widely used indicators here as a starting point to thinking about economic crises.

1. GDP

Gross domestic product (GDP) is the de facto measurement of the state of an economy and can loosely be considered the total production of an economy. Economic activity naturally fluctuates, but a declining growth rate means there is a storm coming. The combination of the length and depth of a recession, as well as its reach and cause, will determine the sharpness of that recession.

Recessions matter because they usually signal underlying problems within the economy. The production, consumption, and income within an economy only decrease if other indicators are deteriorating. Implicit within GDP as a measure is the recognition of the interdependence of production, consumption, and income. As consumers spend more of the money they earn, businesses and producers sell more, resulting in an expansion of the economy and GDP growth.

On the other hand, unemployment increasing results in incomes decreasing, which results in consumption decreasing, meaning businesses and producers cannot produce and sell. In this case, GDP would decline, causing the economy to shrink. These circular flows are central to economic models. This is why GDP in some senses can be considered a sort of core indicator.

Source: ONS – GDP in the UK from 1955 to 2020

The above chart showcases GDP growth in the UK from 1955 to 2020. The 1970s and 1980s saw severe and frequent recessions, whilst the 1990s saw a shallow recession. Then there was a period infamously called ‘The Great Moderation’ where British Chancellor and later Prime Minister Gordon Brown extemporaneously declared the end of the boom and bust cycle, until it all came crashing down in 2008.

Our current economic predicament is very clearly visible on the right-most edge of the chart with a sharp downturn.

There are many differences between 2008 and now. This isn’t a financial crisis like the subprime mortgage crisis of 2008. A pandemic is an entirely different beast and a more ‘natural’ cause than an intrinsically financial crisis. The economy was essentially quarantined and kept in an almost comatose state due to government intervention and quantitative easing.

Even in the US, it is turning out to be a very unique recession and the predictions of a Great Depresion-esque crisis don’t seem to be manifesting with many parts of the economy doing better than expected, whilst some indicators, such as unemployment, deteriorating.

The 2008 crisis changed the way governments react to crises and broke the taboo of pumping colossal amounts of money into the system. The UK and US governments, both currently more free market in bent, didn’t hesitate in swiftly creating a financial backstop in the economy and exacting precise stimulus packages.

We are living through a very weird recession where the property market is booming, the stock market is roaring, large businesses are profiting, whilst small businesses are breaking and millions of people are losing jobs.

2. Unemployment

Unemployment is one of the nastier effects of economic crises on a human scale. As I mentioned in my introductory post, we are in a game of survival, and in the modern era survival for most people is facilitated through wage labour. Losing your job puts the survival of some of your more primal needs at risk.

In economics, unemployment specifically refers to someone who isn’t working but is actively looking for work. The aggregate of those employed and those unemployed are the labour force of a country.

Those who have looked for a job in the past year but are now discouraged are called marginally attached workers. Those not looking at all are simply not counted in any of these categories and are considered ‘economically inactive’.

These categories and distinctions are not merely academic, currently in the UK the unemployment rate is at one of the lowest it’s ever been. Taking unemployment data in isolation, you wouldn’t be able to tell that we’re living through a crisis.

The number of people that have become economically inactive or marginally attached has increased, since the job market has been shattered and there aren’t enough vacancies for many to even be classed as unemployed. It’s important to take a holistic view of data and encompass the full narrative.

In economic crises, not only does the number of unemployed people increase, but so does the number of ‘underemployed’, which refers to involuntary part time workers who want to work full time, or those with skills having to work in unskilled jobs.

All these figures point to the reality that there is a lot of inefficiency in the economy, and parts of it are broken, especially during a crisis. The available resources and skills are not being allocated as efficiently as they could be, and the shrinking economy in a crisis leaves more and more people without a means of income as businesses make cuts.

The circular flow of income also means that less people being paid means less is being consumed and therefore produced, which will result in even fewer people being paid. Understanding this is key to understanding how grave the downward spiral of rising unemployment can be. For businesses, wages have a dual nature: they are a cost of production, but also a source of income since people with wages will purchase what they produce.

Rising unemployment can cause serious social ills and instability, which is why governments take unemployment and falling production very seriously since they have a ripple effect on the rest of the economy.

The UK faces an impending unemployment crisis as the government stops pumping money into the system and stops paying the wages of workers. Businesses will be making the hard choice of making swathes of the work force redundant.

Unfortunately, as with a lot of economic indicators, it can take time for markets to recover. And a fundamentally important point is that the opportunity costs of a crisis are devastating. For example, if a person who was advancing in their career lost their job this year and had to settle for an unskilled job, they may lose an entire year or more of experience in their field, not to mention the reduced income, which will have an acute knock-on effect on their total future income and quality of life, as well as stunting the maximum they could have achieved.

From an investing perspective, earning £10K less due to losing your job and having to settle for a lower paying job means your disposable income decreases. This means you have less money to invest, and you can’t take advantage of compounding effects for this period. This will decrease the total return in your lifetime and there is no way to get this opportunity back, only to make the most of the present and the future, and endeavouring to make your financial position more robust.

3. Inflation

Inflation is a general rise in the price levels in a country, and a fall in the purchasing power of currency.

The effects of inflation and unemployment are distinct in that unemployment is immediate and a shock: you’re working one day, and the next day you don’t have a job. Inflation stealthily creeps up on you, gradually eroding the value of your money and degrading the standard of living. If unemployment is like a sudden acute illness or accident, inflation is like a chronic illness.

In order for standards of living to remain stable, wages and earnings must increase in line with inflation. So the antidote to inflation on an individual level is simply to earn more, and for returns to be above the inflation level. Though this is easier said than done in many cases, especially in an economic crisis.

Deflation can also occur over time. In some cases it can even be positive, for example, due to the digital revolution of the past few decades the price of computing power from the 1980s to 2020 has decreased drastically since it is becoming cheaper to produce computers, and because knowledge has increased and economies of scale have been fully established.

It is also important to note that some types of goods or sectors can face sharp inflation, or even deflation, relative to others. For example, in the current pandemic, the prices of many staple and basic foods increased sharply due to high demand. In fact, some businesses were artificially raising prices because of higher demand.

In an economic crisis, where people are losing jobs and wages are decreasing, where some goods are increasing in price and there is a fear of inflation shock due to high levels of quantitative easing, inflation can be a real worry. Some fear a sharp rise in inflation in a post-covid world due to the sudden increase in demand and pent up activity, and lost opportunity.

Source: Bank of England

It is too early to say what inflation looks like in a post-covid world. Decreasing global economic activity, falling demand and falling incomes can all have downward pressures. Some predict that deflation may be an issue, due to a longer term time horizon for recovery as well as lost opportunity and a massive build up of debt.

4. Inequality

Steve Eisman of The Big Short fame proposed the inequality of income distribution as one of the causes of the 2008 Global Financial Crisis. His reasoning is that income distribution started to become more imbalanced in the 1990s, and instead of focusing on that problem, the US let ‘credit get democratized’ which essentially allowed people to lever themselves by taking out loans on their homes. This is the predatory lending I mentioned.

The 2009 edition of The State of Working America, published by The Economic Policy Institute in the USA put it quite succinctly: ‘the economy did well, except for the people in it.’

Income inequality means that most people do not benefit proportionately from increases in the economy. The pie is getting bigger, but not everyone is getting a taste, or at least not enough of a taste. Inequality is impossible to avoid and has been inherent in every human society. However, when most people earn their living through wages, a lack of significant increase in those wages whilst other parts of the economy expand is a huge problem.

The GDP of a country is representative of the income of that country. The income of a country can be roughly divided here into wages/salaries, profits, rent, and interest.

Source: LSE: Percentage share of wages in UK GDP

Percentage share of wages in UK GDP

Living standards of a lot of people (up to around 60%) have become decoupled from the growth of the economy, and as in the chart above, people that are not rich are not benefitting as much from the growth of GDP. Richer people are more likely not only to earn a salary, but also benefit from rents and profits, and so they are benefitting more from the increase in GDP. Whilst the average person has the sole income stream of wages/salary, to which GDP is not being trickled down to, and so the average person doesn’t benefit from that growth in GDP.

Another aspect of inequality being experienced in the current Covid Crash is between small and big business. As big business has more cash, avenues, and resources to stay afloat, many small businesses are drowning, which is going to have acute economic and policy effects for the next few years.

The UK government has done remarkably well in providing loans to many small businesses. While in the US, however, big business is receiving much more favourable terms. The stock market shows that the US mega-caps are eating up more and more market share. This is another perspective on inequality.

When the indicators of economic inequality are deteriorating, it can lead to second order effects that can cause devastation in the future. 2008 showed us that the hedonic treadmill is ever present. People wanted to have a lot more money so badly that they borrowed their way into a crisis.

5. Debt

Source: Bank of England: Total value of sterling lending secured on dwellings

The above chart is fascinating for two reasons. Firstly, the left side shows that as Steve Eisman rightly surmised, people took out loans on their homes at record amounts before the financial crisis of 2008. We borrowed our way into a crisis. This fell sharply after the crisis began unfolding.

Secondly, as soon as the Covid Crash started, banks and lenders stopped giving out mortgages and loans. One major benefit of the 2008 crisis is that it led the way to critical financial reform which has made financial institutions a lot more responsible and even risk averse in many ways.

Too much debt in the economic system leads to fragility that eventually cascades into a financial meltdown. As Nassim Taleb warns us, too much debt is evil. In a hyperglobalized system we face volatility like never before, leaving us highly exposed to black swan events.

On an individual level, high debt and high interest reduce optionality. Debt becomes a shackle that follows you like a financial shadow. It promises you more, and in return gives you less.

Our ancestors understood that debt, especially high levels of it, is not respectable in a civilization.

The context of debt as an indicator in the wake of the 2008 Global Financial Crisis is that there was a wage squeeze as we explored, and real wages were not really increasing in line with GDP. Lifestyle creep, media, and keeping up with the Joneses get to us as social animals. We constantly compare our lives to others and are dragged into envy of material things.

So what did we do? We simply borrowed, using a silent but lethal option that was a ticking time bomb. Predatory lending meant that banks practically handed it to us. Rising debt is probably the most lethal indicator of these five since it gives the illusion of prosperity but eventually asks for everything and more in return.

All these indicators are connected and are in a constant commingle. One indicator will eventually cause a deterioration in the next. Complexity dictates multicausal theories where you must look at events from different perspectives and with multiple indicators to achieve a holistic appreciation of the narrative. History never repeats itself, but it has a tendency to rhyme.

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  1. Fields of studies, such as economics, will want to claim scientific status because of the material benefits and the (relatively) precise nature of natural sciences. This has popularly been dubbed physics envy in this case. Economics is not a science, and an overwhelming amount of economic theory bears no relation to reality. See discussions in the philosophy of science as well as critiques of economic theory and models. []
  2. The terms crisis and depression are not precisely defined in economics. Some economists and policy institutes do not distinguish between them, seeing the events after 2008 as merely a bad recession (National Bureau of Economic Research (NBER), 2012). Others demarcate between crises and depressions by identifying the latter with more severe economic costs, and, more importantly, with large scale economic restructuring and policy change (Perez, 2002). []
  3. Contagions of all kinds can spread more easily in a world that is increasingly hyperconnected. From actual viral contagions, the likes of which we are living through right now, or economic contagions as in the subprime mortgage crisis in the Global Financial Crisis of 2008. []

Nuovo Wealth, New Wealth: The Games We Play

All the world’s a stage,
And all the men and women merely players;
They have their exits and their entrances,
And one man in his time plays many parts

As You Like It, Act II, Scene VII – William Shakespeare

There is something to be said about the frantic spark of a human life which eventually cools into a whimpering silence. The bard, as always, captures the essence of life and this world in these verses. Life and the markets are simply a series of repeated games rhyming throughout history, one winds up to give birth to the next.

We are all unwitting players in this brief phantasmagoria: making our entrances and our exits, making our moves and plotting, succeeding, and failing. These are the games we play. The only choice not given to us was whether we wanted to make an entrance, and eventually an exit, in the first place. What we do with the brief time we have been given on this stage is wholly and completely our choice, and that is what this site concerns itself with.

This site in particular is about the most primal of games that we collectively engage in as biological organisms: the game of survival1. The game of survival, in turn, is dependent on the game of resources and the game of relationships. Luckily, we have a name for resources funnelled through relationships of trust: money.

Money is not something you can touch and pass around (which you can do with currency). Money is a social construct based on trust. More importantly, money is a network of flows of material and information interwoven into the fabric of human relationships. Money is the language we have constructed to navigate our material human networks.

We also have a name for accumulated resources: wealth. In that regard, this site will talk about all aspects of wealth: the creation, acquisition, movement, growth, allocation, preservation, distribution, and destruction of wealth.

The growth, allocation, and preservation of wealth are the most difficult of all these endeavours, as we must remember there are no free lunches, only trade-offs. Every decision has an opportunity cost. Which is why this site will discuss investing, markets, finance, and personal finance from the level of a novice to the most intricate depths therein.

Evolution dictates a continuous cycle of generations, with a new generation springing forth from the deeds of the previous generation. The new generation inherits a world that has been left by the older ranks in all its glory and failings. We have the advantage of learning from the mistakes of our forebears, improving the structure which they left behind, and avoiding that which led some of them to ruin.

There’s a new generation now playing the game that has always been played, with some modifications of course. The most important revolution in finance and investing for my generation is the internet and software boom upon which the entire world is run. Gone are the days of the bank manager and the stock broker who you would pick up the phone and talk to, also gone are those not so far away days in which you would have to pay high commission rates to trade equities. We live in the world of the instantaneous, the electric, the world of software and smartphones and apps. Information has never been more abundant, nor has the ability to make money in a myriad ways.

We’ve also inherited a world in which we’ve been alive through two of the worst economic crises of the past century, where real wages are not increasing as much as they should have or even decreasing in some years, a world where student debt is skyrocketing (especially in the US), in which climbing the rungs of the property ladder has become akin to climbing mountains; the world we live in is a world of generational wealth divide and lost opportunity.

One of the best ways of bettering our tiny corners of the world for ourselves and those we love is through learning about these games and getting some skin in the game. Financial freedom and independence and control of your financial life can be one of the noblest aims you can achieve because the second order effects can be so virtuous.

This site will meld practical, empirical, and theoretical considerations. I will discuss matters of the quotidian life such as savings products and tax planning, to legal structures affecting your finances, to the theoretical considerations of macroeconomics and econometrics, to philosophical discussions on decision-making, risk, probability, and statistics, to debates on investment analysis, valuation, and equity research, to quantitative finance and uses of Python to esoteric discussions on the nature of money all the way back to the concrete concerns of portfolio construction, asset allocation, and asset classes.

I don’t aim to take myself too seriously, and I hope I can make just enough mistakes to create real growth in my understanding of all this madness. And most importantly I hope I have fun.

This website will allow readers and observers to see the real time development of someone slowly wading into the waters of the world of wealth. The aim here is to document, share, and grow my learning trajectory with others and to debate, discuss, and learn everything finance and investing related, and to help myself and my readers engage in finance and investing in all its multi-disciplinary and multi-purpose ways.

It was the best of times and the worst of times. These are the cards we have been dealt, and it’s with these cards we must make our moves. The times are changing, and there’s new wealth on the horizon.

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  1. The word ‘game’ here is used in two senses. Firstly, as a metaphor pure and simple. All these things we do everyday are games of some kind. There are limitations and constraints within which we must carry out the activities that make us who we are; in essence, there are rules which constrain the moves we can make: a game. Secondly, I mean it in the broad connotation of game theory and all its ideas. John Von Neumann made a distinction between something like chess which he likened to a well-defined form of computation where there must be a right solution theoretically, and between something like life which is a game in a very different sense, where there may be no right answer to something at all. []