Barton Biggs - Wealth, War and Wisdom
This book reads as an excuse for Biggs to do some World War Two armchair'ing, as it spends far more time on battles and the big men than on market mechanics.
Which unfortunately means it does not credibly answer the question posed.
at least once in every century there has been an episode of great wealth destruction when the Four Horsemen of the Apocalypse -- Pestilence, War, Famine, and Death -- have ridden rough-shod. World War II was the last time that the pale horse with Death on his back and Hell following him terrorized the world.
How do you preserve wealth in times when the Four Horsemen are on the loose?
Public debt and equities don't perform as: (a) uncertainty increases, (b) people sell to cover expenses as the economy shifts to war-time, and (c) the concerns of the rentier class pale in comparison to everyone else's. So what should we do? Have a sliding allocation between cash and stocks depending on global bellicosity?
A handy personal finance framework is the tiered fountain of money, where its head is our income, and the first vasque holds our emergency savings, which overflows into holdings of short-term debt, then into public equities, finally pooling into private holdings. 1
While strategies abound, there are two that are more war-resilient. The "Armenian" strategy is focus on the fountain head, ie. educate oneself so that knowledge and ability guarantees work anywhere that will be well-remunerated. And the "barbell" strategy has only a small vasque for public equities, so that one is always looking for private holdings in some country.
However, which countries should host the assets? There's a finance parlor game that can help: pick a decade and argue where was the best place to live. Run that for today and then iterate backwards by decades. While each of us has different answers, our rationales should frame the country decisions because ultimately we may be forced to move there.
How to prepare for war?
Survival lies largely in being willing and able to move out of its way. What are the monitorable precursors to war? List the news items that, if they occurred, would force the prudent to emigrate. Then pre-commit to it.
Test the money fountain! Instead of vacationing for a month or less, move to a new country for at least several years. Does income hold up? Do other parts of the fountain break?
Finally, suppose one dies (as happens in war) without a producible death certificate; will the family be able to pick up the pieces without much loss?
The world is and always has been prone to disasters that destroy great globs of wealth. In earlier centuries there were wars, natural disasters, famines, and plagues. Then in the eighteenth and nineteenth centuries came revolutions that conf i scated wealth and heads. The last century, the twentieth, was perhaps the most ruinous of all time with World War I, hyperinf l ations, the Great Depression, and then the inter - connected climax, the worst ravager of them all, World War II. It was truly a world war, and in retrospect, it was a close call whether Western civilization as we know it was going to survive.
the British stock market bottomed for all time in the summer of 1940 just before the Battle of Britain; that the U.S. market turned forever in late May 1942 around the epic Battle of Midway; and that the German market peaked at the high - water mark of the German attack on Russia just before the advance German patrols actually saw the spires of Moscow in early December of 1941.
Those were the three great momentum changes of World War II although at the time, no one except the stock markets recognized them as such. This, to me, confirmed the extraordinary (and unrecognized) wisdom of market crowds.
much of the Western world were still mired in a vicious cycle of depression, def l ation, soaring unemployment, and social unrest, that capi-talism seemed unable to cure. The pessimists argued that democracy was an ineff i cient and impotent form of government that lacked the forceful leadership, eff i ciency, and freshness of national socialism.
The British Empire was unraveling. Her crown jewel, India, was rebellious and restless for Freedom at Midnight. Gandhi was threatening to negotiate a safe passage for Japanese troops through India to enable them to coordinate with Hitler in return for India s independence.
Churchill worried about a Japanese invasion of India. Even in the United States, in many quarters there was no sympathy for the Empire. In early 1942 in a letter to the British people, Life (at that time the dominant American magazine) warned one thing we are sure not fi ghting for is to hold the British Empire together.
MacArthur's orders to his troops in the withdrawal across Bataan to Corregidor were unrealistic at best and suicidal at worst. Dugout Doug, was what the Marines who had to dig his dugouts every time he visited the front lines called him. In the fi rst few days of the war, his domineering and imperious chief of staff blocked access to him, and as a result his air force was not deployed or dispersed even after the attack on Pearl Harbor. Instead, with a Japanese invasion fl eet approaching, the planes were inexcusably parked wing tip to wing tip on the runway and easily destroyed by the Japanese 24 hours after the attack on Pearl Harbor.
Once, when he was seated at dinner and had argued politics with the very beautiful but very liberal Lady Astor, in exasperation she told him: Churchill, if I was your wife I would put arsenic in your coffee. He replied: Astor, if I was your husband I would drink it. His wit could be cutting and acerbic. At another dinner, Bessie Braddock, a corpulent Labor Member of Parliament who Churchill disliked and who had heckled him, said loudly: Winston you are drunk again and what s more you are disgust-ingly drunk. Churchill surveyed her and replied: And I might say, Mrs.
Braddock, that you are ugly, but tomorrow I shall be sober and you will still be ugly. On another occasion, Aneurin Bevan, a leader of the Labor party and a committed Socialist, was standing at a urinal in the Members Only House of Commons Men s Room when Churchill entered and went to the urinal furthest away from Bevan. Feeling a little standoff i sh are we today, Winston? asked Bevan. No, replied Churchill, it s just that whenever you Socialists see anything big and robust you want to nationalize it. Bevan was not amused by Churchill s brand of humor. He is an adolescent . . . an extrovert, a picture thinker. He really has the values of a boy of 17 or 18, but he makes them sound like mature judgments by his sophisticated speech. Another Labor rival, Clement Atlee (who Churchill once described as a sheep in sheep s clothing and as a mod-est man with much to be modest about ) said, Fifty percent of Winston is genius, fi fty percent bloody fool. To make ends meet between the wars, Churchill had been forced to resort to speaking tours in the United States and Canada. He abhorred the endless receptions and sometimes had one cocktail too many. At one event in Canada after a long day he found himself in a group chatting mindlessly with a stiff - necked but loquacious Methodist bishop. An attractive young waitress approached them with a tray of sherry glasses.
Churchill took one and then she offered another to the bishop. He was aghast at the prospect, and said huff i ly something to the effect of: Y oung lady, I d rather commit adultery than take an intoxicating beverage. Thereupon Churchill, or so the story goes, beckoned to the girl: Come back, lassie, I didn t know I had a choice.
Churchill s ascendancy to prime minister was not particularly popu-lar. Churchill s wit and his caustic pen had offended many powerful members of the House. On occasion he seemed to revel in his acid one - liners, oblivious to the enduring animosity of the recipient. Of Stanley Baldwin, once a prime minister from his own party, Churchill had said:
Occasionally he stumbles over the truth but hastily picks himself up as if nothing has happened. On another occasion during a long session in Parliament, a member was droning on in a tedious discourse. Churchill reacted by slumping in his seat and closing his eyes. The speaker, notic-ing the nap, asked, Must the right honorable gentleman fall asleep when I am speaking? Churchill opened his eyes and replied, No, it is purely voluntary.
When possible, Churchill liked to take a brief nap in midafternoon, preferably in pajamas and then work most evenings until well after midnight, often till two or three in the morn-ing. Like Hitler, he often scheduled meetings with his senior advisers for late in the evening which wreaked havoc with their metabolism, sleep, and family lives.
Another night at Bethnal Green Station during a raid, a woman tripped and fell on the stairs. Those directly behind her fell over her, and the rest stampeded. That night 250 people were either trampled or suffocated to death.
However, as 1940 passed into 1941 and the Blitz continued, the Londoners adjusted. Families began to have permanent patches of plat-form, and a neighborhood atmosphere developed.
Another consequence of the bombing was the evacuation of women and children to the countryside and a dramatic rise in the divorce rate of middle - aged men and women.
On the other hand, the arrival of the American forces in 1942 with cigarettes and nylon stockings revitalized the black market and created wealth for the wrong kind of people. Thus two patterns that were repeated across Europe throughout the war emerged in England. Jewelry was the most portable, liquid, and easily protected form of wealth, and the only people that got rich during the war were those connected in one form or another to the black market.
In May and June of 1940 most stocks in London were selling at 20 % to 40 % discount to book value, and the faint - hearted pessimists sold to the resolute. In fact, buying shares was viewed almost as an expression of conf i dence and def i ance.
In April, Churchill instructed the British ambassador in Moscow, Sir Stafford Cripps, to deliver a personal message to Stalin warning him that an attack was imminent. Cripps, thin, tweedy, stubborn as well as self important, believed he had already warned the Russians and much to Churchill s irritation never did directly deliver the message to Stalin. Churchill later mused that perhaps if Cripps had given the warning, at the very least the Russian air force would not have been caught lined up in orderly rows on the ground on the fi rst day of Barbarossa. -- ya never know. stupid macarthur did the same thing in PH
In November of 1940, Stalin had used a pretense provocation to launch 36 infantry and 6 tank divisions in a surprise attack on Finland.
Russian planes heavily bombed Helsinki, hitting residential as well as industrial areas and killing many civilians. Finnish reports of these raids were dismissed as fabrications by the Soviets who claimed that the Russian air force had been dropping bread for the starving Finnish people. The Finns called the bombs Molotov Breadbaskets, but no one in the West thought the fantastically outnumbered Finns had a chance against the Red Army.
Hitler and the other Nazi leaders would be arrested and held for trial on charges of murder. A nonaggression statement would be issued, the army would stand down from the Czech border, and an interim army government would be installed prior to elections. All that was required to activate the plan was for Hitler to come to Berlin where he could be captured.
On the morning of September 14, 1938, Hitler arrived in Berlin from Berchtesgaden. The plotters quickly convened and decided to execute the plan commencing at 8 p.m. that day. All units were in posi-tion when late that afternoon Graf von Helldorf, the police comman-dant of Berlin, was notif i ed that Prime Minister Chamberlain suddenly was fl ying to Berchtesgaden to meet the F hrer, and that Hitler s motor-cade had just left Berlin for Berchtesgaden. The plan had to be aborted.
Although the Russian soldier had always been brave and resolute, a ruling reason for their fi ght to the last man mentality was that Stalin immediately after the attack had announced that anyone who surren-dered would be considered a traitor. There are no Russian prisoners of war, he announced in a general order issued June 25, 1941. A POW s children would be deprived of their food ration, and his parents sent to the gulag. If a man who had surrendered escaped, he was immediately sent to the work camps or shot. As a result of this harsh policy, Russian POWs were amenable to fi ghting for the Germans in return for better living conditions. The Russian Liberation Army of 50,000 POWs fought for the Germans at Stalingrad under the command of a Russian general.
Soviet fi eld commanders, including general off i cers, who failed to achieve objectives or who retreated, were removed from command and often executed on the spot by the fi eld commissars. Stalin s dictum as published in General Orders was No Retreat and No Surrender Under Any Circumstances. From his dacha, the dictator practiced what he preached. He had always had a diff i cult relationship with his oldest son, Yakov, but nevertheless he was his fi rst born. When Yakov was captured near Smolensk, the Germans thought they had a prize and offered to exchange him for an imprisoned German general. Stalin disdainfully rejected the offer and instead arrested and imprisoned Yakov s wife Yulia.
Yakov later died in a German concentration camp when in despair he threw himself against an electrif i ed fence and was then shot by a guard.
One reason the Red Army performed so poorly in the fi rst months of the war was its lack of experienced senior off i cers. Y ears earlier, the German intelligence chief, Hans Heydrich, knowing that Stalin was a murderous paranoid, ingeniously through double agents fed that suspi-cion until the dictator became convinced his general staff had been inf i ltrated by German agents. In late 1936, Heydrich skillfully allowed 32 documents to be discovered that conf i rmed Stalin s fear of treachery.
They included letters that implicated the Soviet chief of staff, Marshal Tukhachevsky, and other senior generals as having been in direct corre-spondence with the German military. In a three - year reign of terror, Stalin liquidated 35,000 fi eld grade off i cers, or about half of the Red Army s off i cer corps
In 1942, the German high command issued this warning: We Germans make the mistake of thinking that if neither offensive nor defensive operations are in progress, then there is no war going on. But the war is going on . . . when we are cooking potatoes, when we lie down to sleep. A soldier must carry his weapons always and everywhere. Stalin also was always suspicious of independent guerilla bands, particu-larly if they were Ukrainian. In 1944, he invited the leaders of three of the biggest Ukrainian groups to Moscow. They never returned.
Japan had a close relationship with the Morgan banks, which the aristocracy was loath to sever. Morgan had underwritten large international bond issues for Japan at diff i cult times after earthquakes.
Admiral Naguno now elected to land his planes that were returning from Midway and his covering Zeroes. He was conf i dent he could han-dle anything that Midway could throw at him, and he began to refuel and rearm his aircraft with bombs for another attack on Midway.
Suddenly he received a belated report from one of his patrol planes of the appearance of the American fl eet. Quickly he made the decision to forget the bombs and rearm with torpedoes for an attack on the American fl eet. Normally this would take half an hour, but his opera-tions off i cer, Commander Minoru Genda, allowed the planes returning from Midway that were running low on fuel to land fi rst. The timing turned out to be fatal. Genda, a graduate of Princeton who later became postwar chief of Japan s Self - Defense Forces, bitterly blamed himself for not immediately sending the Midway planes circling overhead to attack the U.S. fl eet. He knew they lacked the fuel to return, and he was close friends with many of the pilots in the air above him.
As 1942 began with more losses and defeats, the sluggishness and declines in both the London and New Y ork stock markets continued. In fact as Robert Sobel (who wrote the def i nitive history of the New Y ork Stock Exchange, The Big Board ) describes, February 1942 was the slow-est month at the exchange since 1915. On February 14 there were only 320,000 shares traded and there was one hour with a total volume of just 30,000. A seat on the Exchange changed hands for $ 17,000, the lowest price since 1897 and 97 % below the record high of $ 625,000 in 1929.
Courageous the pine That does not change in color Under the winter snow And truly the men of Japan Should be a forest of pines.
Ambrose Bierce in The Devil s Dictionary describes patience as a minor form of despair disguised as a virtue,
The Fas-cist regime was extremely corrupt, but they wanted to be the only organization preying on Italy. By the early 1940s, the Italian Maf i a was virtually out of business. The invasion of Italy by the Allies ended their harassment by the Fascists, and presented the Maf i a with lucrative oppor-tunities. The Maf i a dons learned the names of Italian - American off i cers and quickly moved to ingratiate themselves with the na ve and gullible Americans. By 1945, the Maf i a controlled the black market and local governments, and become once again a major force in Italy.
What is the message for owners of wealth who have lived in a country for generations but are a minority particularly a prosperous minority?
It seems obvious. The Germans Jews call it shtetl, literally the ghetto mentality of always looking over your shoulder. The rich overseas Chinese in Indonesia and the Philippines have always kept a nest egg in Singapore or Hong Kong because they know their indigenous business empires are only a pogrom away from conf i scation and destruction. The message for anyone who has either created or inherited big money is don t fl aunt it, and no matter how secure and integrated you feel, always keep an escape hatch open and maintain some substantial wealth outside the country. Just be very sure the legal entitlements to that overseas wealth are utterly, incontrovertibly clear.
Even more important the surrender at Stalingrad convinced many fellow travelers and skeptics around the world that Communism was the dynamic world force with the consequent effect on postwar politics.
And as Churchill noted, Stalin became even more imperious and intrac-table. The concessions made to him at Yalta derived in part from Stalingrad.
A German warlord, Count Moltke a hundred years ago summarized the inevitabil-ity and glorification of war: Perpetual peace is a dream, and it is not even a beautiful dream. War is an element in the order of the world ordained by God. Without war the world would stagnate and lose itself in materialism.
The happening and timing of Black Swans are utterly unforecastable. Beware you do not become obsessed with them.
Nietzsche said it succinctly: Stare too long into the abyss and you become the abyss. As a wealthy person, you should have 5 % of your money in a safe haven. Y ou should have another 5 % in a farm. Y ou should own some Treasury Inf l ation Protected (TIPS) bonds. But, in my view, the right percentages are 5 % to 10 % ; not 50 % . Again Nietzsche said it best.
Ignore the past and you will lose an eye. Live in the past and you will lose both of them.
In my considered but not necessarily correct opinion, a family or individual should have 75% of its wealth in equity investments. A cen-tury of history validates equities as the principal, but not the only, place to be. As David Swensen likes to say, you as an investor in an inf l ation prone world want to be an ownernot a lender. Most of that commit-ment should be in publicly traded global equities. Dont try to time short term market swings. What you want to capture is that wealth purchasing power compounding from the real return of stock. Tilted, refreshed index funds, or even just plain vanilla index funds, are fi ne. Dont fuss with high fee investment alternatives, and in general, dont get fancy and try to pick the best global managers or hedge funds. Last years superstar may be next years bum.
Another, much smaller part of your diversif i cation strategy should be to have a farm or a ranch somewhere far off the beaten track but which you can get to reasonably quickly and easily. Think of it as an insurance policy, and for rich people in the developed economies a farm is a fi ne diversif i er and probably an excellent long - term investment. Per-haps its purchase price should amount to fi ve percent of your net worth.
The control of food - producing land is a basic instinct of mankind, and landowners seem to fi nd considerable psychic satisfaction just from the knowledge of possession. There are few things as fulf i lling as having drink in the sunset and looking at your fi elds and cows.