Category: The Pamphleteers
As a teenager at Rugby School, attendance at chapel was pretty much mandatory, forming part and parcel of a Pavlovian regime. If I wasn’t gawping at my unfortunate female classmates - who were in a tiny minority - I would be scanning the wall plaques in awe, commemorating an array of eminent past pupils. My gaze should of course have been lowered and bowed in prayer. Whenever my Housemaster spotted my wondering eye he would aim his icy stare in my direction and my head would snap down, as if shot by a sniper from behind.
I remembered one plaque that seemed rather isolated and desultory with a window drawstring dangling disrespectfully over it. On further investigation I discovered it was dedicated to Charles Lutwidge Dodgson, better known by his pen name Lewis Carroll, author of Alice’s Adventures in Wonderland. He was a master of wordplay and mathematics, inventing the forerunner of Scrabble.
Some believe that the so-called nonsense literature that characterised his work was his way of mocking a trend among contemporary mathematicians. They were debating illogical ideas such as imaginary numbers and the square root of a negative. It was anathema to the conservatively-minded Carroll, long before alternative concepts in quantum mechanics became commonplace.
In the sequel Through the Looking Glass, Alice steps though a mirror into a back-to-front world. It is reminiscent of the topsy-turvy future we face in finance. In some ways we are already there in that you are charged to deposit money in some currencies. Likewise a recent UK government bond issue had a negative annual yield; and it was over-subscribed. In other words you are paying the government to lend them money – go figure.
In many cases there is little choice. Insurance companies and banks have been driven by legislation to allocate money to ‘safe’ government bonds. Thanks to Quantitative Easing, interest rates are now too low for many pension schemes to meet their commitment to members. They cannot generate the income to pay pensioners and will eventually eat into capital to do so; the well will run dry as we live longer. It is of course different for government staff who can tax the rest of us to fund their retirement.
As we enter an inflationary period we are likely to see bond markets suffering. Bonds are key components of pension funds, purchased to generate income or yield. I was fortunate because my previous employers provided a fixed pension in retirement, known as a defined benefit scheme. One of them is even offering me a bonus to transfer it away to clear the liability off their books. I have calculated that the transfer value now matches my entire earnings while working at the firm; such is the extent of the financial distortion.
One of the few methods of protection in an inflationary scenario is provided by precious metals. Up until 2016 they had endured several years of pitiful performance and were out of favour. Many conventional investment managers are very sniffy about gold and silver, viewing them as unsophisticated or simply too volatile. Instead it is easier to regurgitate disparaging comments heard elsewhere to sound smart. Consensus-driven committees are all-too-ready to cling to negative sound-bites to avoid discomfort. They dismiss what they don’t understand to circumvent controversy and debate.
Economics resembles a cult rather than a science, where heretics are denounced and driven-out. It is no wonder that financial parlance includes words with religious overtones such as obligation and redemption. To be fair it is understandable for investment managers to become conditioned and cling to familiar assets like bonds as they have risen inexorably for the last 35 years. To put this into context the rally started during my adolescent daydreaming; a period that covers the entire career of most finance folk. The collective memory of the 1970’s has all but disappeared from the psyche of market participants. I for one relish interrogating retired City folk who were around at that time to tap into their wisdom.
A Hollywood blockbuster of Alice in Wonderland was released by Paramount Pictures in 1933. It is was an era of reflation as America abandoned the last vestige of the Gold Standard to counter the Great Depression. Bullion ownership was outlawed so there was little defence against the subsequent and substantial devaluation of the US Dollar. It was a time of big government, trade tariffs and major infrastructure projects to mop up mass unemployment. The politics of the époque bear an uncomfortable parallel with modernity. As stated in my book a decade ago, financial turmoil has a tendency to push opinions from a crowded centre to the far left and right, as the political pendulum oscillates to extremes.
Madness was a key theme behind Carroll’s publication, particularly for the enigmatic characters at the tea party. The Hatter was a reference to hat-makers who frequently went insane from their exposure to Mercury, which they utilised to cure felt. The character is reminiscent of central bankers who speak in riddles which they don’t know the answer to. Mad as a March Hare is a familiar idiom, relating to the animal’s excitability in the mating season. Its role was that of a messenger and is evocative of the financial press with its constant chatter over pointless minutiae, meanwhile missing the big picture. The soporific dormouse is akin to the investment community, sleepwalking into the next crisis as the next major trend unfolds.
At the end of the chapter Alice makes an indignant exit from the lunacy of the tea party, unlocking another door with a golden key to enter the rose garden. In the next article I will give my thoughts on the forthcoming flight of funds, entitled the Exodus to Equity.
Toby Birch is managing director of Birch Assets Limited in Guernsey. Educated at the City University in London and a Fellow of the Securities and Investment Institute, he also holds the Securities Institute Islamic Finance Qualification and is author of The Final Crash: Addictive Debt & the Deformation of the World Economy (Pendula Press), written under the pen-name Hugo Bouleau.