Markets are as crazy as ever but I’ll have more thoughts on that next week. As I mentioned in the last Sleepy Portfolio, I was out in Eastern Canada when Hurricane Fiona hit so I had lots of time to catch up on my reading list.
Here are my reviews and thoughts on four books that I got through.
Title: Freezing Order: A True Story of Money Laundering, Murder, and Surviving Vladimir Putin’s Wrath
Author: Bill Browder
Release Date: April 12th, 2022
Rating: 8/10
Recommend: Yes
Thoughts: Freezing Order is former hedge fund manager Bill Browder’s second book, after Red Notice (which is a favorite of mine). It was still a good book that is well-written and easy to read, but I didn’t find it as good as the first one. I found the timeline more jumbled and some things seemed a bit blown out of proportion (such as the possible Trump / Putin prisoner swamp that seems incredibly unlikely). There was also less insight into what was happening within Russia but that was likely due to Bill having been banned from entering the country for over a decade.
But Bill Browder is doing very good work and it deserves a lot of attention. Plus, some of the people that he names and shames in the book deserve (especially a couple of lawyers whose conduct was particularly bad) to be held accountable for their actions. All in all, it’s an easy read that can be knocked out in a couple of days, but I definitely recommend reading Red Notice first.
Big Takeaway: Red Notice is a great book that I reread when Russia invaded Ukraine. Reading Freezing Order reinforced many of my thoughts about what is happening in the conflict. The Russian army, much like the rest of the Russian state is comically inept due to extreme levels of corruption, nepotism, and political meddling. And yet, they (especially Putin) will continue to double and triple down in spite of their complete failures. Even more shocking, they don’t seem to care at all about being embarrassed by their own ineptitude or failure. Hopefully, we see a peaceful resolution to the conflict in Ukraine without the use of nuclear weapons, but I’m afraid that it will require Putin being removed from power before anything happens.
Title: Devil Take the Hindmost: A History of Financial Speculation
Author: Edward Chancellor
Release Date: June 1st, 2000
Rating: 9/10
Recommend: Yes
Thoughts: Devil Take The Hindmost has been on my reading list for a very long time. I ended up ordering and reading it when Edward Chancellor’s new book was released (reviewed below). I always enjoy reading about history and this book really delivered. I would rate this book above Charles Mackay’s classic “Extraordinary Popular Delusion and the Madness of Crowds”. It’s an easier read and on par with Kindleberger’s “Manias, Panics, and Crashes”.
It's a fantastic book that does have a couple of shortcomings. Like all of these financial history books, they do jump around a bit. For instance in Devil Take the Hindmost, he dedicates a chapter to the 1920s and the 1929 crash. However, about halfway through the chapter, he starts to compare and contrasts the “Roaring 20s” Dotcom bubble (which isn’t covered as the book was published shortly before its peak). In the entire chapter, it felt like he spent more time on the Dotcom bubble than on the 1920s or the 1929 crash.
Lastly, and it’s not the author’s fault but when I ordered the book, the hardcopy was out of print and the paperback was sold out at the time. So I ordered an “A” grade used copy. Maybe I have higher standards, but I wouldn’t consider what I received anywhere close to “A” grade. The book that I received was heavily stained, had a lot of markings in the 2nd half of the book and the binding was falling apart. My own advice would be to buy a new paperback version.
Big Takeaway: Devil Takes The Hindmost really focused on some of the “colorful” characters of each bubble era and it’s funny (and sad) how similar they are over time. While the world changes and technology continually improve; some things never seem to change. Take for instance this character (and guess who he reminds you of).
George Hudson was a leading British railway entrepreneur and financier during the railway mania of the 1840s and became known as the “The Railway King”. Here is an excerpt from the book:
Hudson contrived to associate himself with the advance of the railways and deliberately fanned the public’s growing ardor. He carefully stage-managed the opening of ceremonies of new lines to extract maximum excitement. “All railways are yet in their infancy, and day after day, week after week, and month after month, they will go increasing their resources,”
…
Hudson’s management of railways was marked by a combination of ostentation, rule-bending, and penny pinching. Red tape, he announced, was a commodity he had formely sold by the yard in his shop but which had no place in his railway empire.
…
In November 1840, a fatal accident on the York and North Midland line occurred after Hudson had employed an elderly train driver with defective eyesight in order to save on wages. Similar accidents became frequent on his railways and Hudson’s critics accused him of sacrificing public safety for profitability.
Title: The Price of Time: The Real Story of Interest
Author: Edward Chancellor
Release Date: August 16th, 2022
Rating: 7.5/10
Recommended: Yes* (Just know what you’re getting into)
Thoughts: I was excited to read Edward Chancellor’s new book but it was not at all what I was expecting. I thought it would be a book delving into the long history of interest rates and loans and how they evolved over time (something akin to his previous book that I just reviewed). And for the first 50 pages or so they delivered. However, the rest of the book focused on the last 20 years and condemnation of it’s easy monetary policies (he is obviously an ardent supporter of the Austrian school of economics). In fact, many of his arguments I would agree with, but again it’s just not what I was expecting when I ordered the book.
My second problem is that I dislike the “grand unifying theories of everything” and this goes for every discipline. From the book, he attributes almost all of the world’s ills (especially over the last 20 years) to be the result of interest rates being too low. I agree with him that ZIRP/NIRP (zero interest rate policy & negative interest rate policy) where a big mistake and central banks took way too long to get off “the lower bound”.
However, conflating other problems with interest rates is often a stretch, and some of them I just didn’t agree with at all. For example, he makes the argument that low-interest rates due to the Great Financial Crisis caused food and other commodity prices to soar in 2009 and 2010, and that directly led to the Arab Spring. However, if low-interest rates caused commodity prices to soar. Then why is it that from their local peak in 2011 to the end of 2019, commodities declined from 172 to 79 or -55% (using the Bloomberg Commodity Index), even while interest declined over the entire period? And that doesn’t even mention the long-brewing problems in the region due to corruption, nepotism, stagnating standards of living, and the internet shattering oppressive governments’ ability to control and “curate” the news and information flow.
And this goes back to why I dislike “grand theories of everything”; because the world is a complex place and there’s more to it than just interest rates. Overall though the book is very well written and researched. He makes a lot of good points and it’s always incredible just how many times “history might not repeat but it definitely rhymes”.
Big Takeaway:
There were two great excerpts from the book that really make you scratch your head and wonder why we as a species have never learned (or remembered) anything.
Here is the first excerpt:
In an influential book, Finance Capital, published in 1910, Rudolf Hilferding came up with the concept of the ‘promoter’s profit’. The Austrian-born Marxist, who twice became Germany’s finance minister in the 1920s, observed that share prices rose and fell in inverse relationship to the rate of interest. (Brandeis likewise observed that ‘easy money tends to make securities rise in the market. Tight money nearly always makes them fall.’) Hilferding made a more original observation: when the returns on industry were above the cost of borrowing, financiers were poised to reap windfall gains. The lower the interest rate, the higher the promoter’s profit.
Wall Street in Morgan’s heyday was more interested in financial chicanery than in directing capital towards the country’s economic development. Only a small part of the $375 million of securities issued in the early 1900s by the Harriman-controlled Union Pacific Railroad was spent on fixed assets, with the rest going ‘mainly to supply funds engaging in illegal combinations or stock speculation’. Pierpont Morgan himself had little interest in new technologies, and famously turned down a request for capital from William Crapo Durant, the found of what later became General Motors. Most of Morgan’s loans were supplied against the collateral of existing businesses rather than directed towards new investment.
The easiest way to manipulate stocks was by applying leverage. That’s where the House of Morgan ruled supreme. In the first decade of the 1900s, the amount of outstanding railway debt more than doubled. As debt levels rose, the quality of debt declined. Nevertheless, low interest rates created an insatiable demand for rail securities. At the turn of the century, hundred-year railway bonds were issued to yield 3.5 per cent. For Brandeis, the heavily indebted New Haven Railroad exemplified all that was wrong with American finance. As this Morgan-controlled trust consolidated railroads across New England, its debt load increased twenty-fold. Brandeis claimed that the New Haven’s financial backers paid less attention to railroad operations than to the market value of its securities. Maintenance capital spending was cut, and dividends that hadn’t been earned were paid with borrowed money.
And here is the second excerpt:
It is no coincidence that the greatest fortunes have been gained during periods of abnormally low interest rates. In late sixteenth-century Europe, the entire wealth of Augsburg, a free city of the Holy Roman Empire, was concentrated in a few hands, mainly in those of the banker Jakob Fugger. The ‘astonishing feature’ of this era was ‘the lowness of the discount rates’. Fugger, described in a recent biography as ‘the richest man who ever lived’, earned his fortune by borrowing rates of interest as low as 2 per cent, and lending the money onwards, mostly to Habsburg emperors, at 10 per cent or more. The magic of compound interest over more than three decades made Fugger, in the words of epitaph, ‘second to none in the acquisition of extraordinary wealthy’.
At the heigh of his fortune in 1720, John Law considered himself to be the richest person in history. As we have seen, the Scotsman’s wealth peaked at a time when interest rates in France had fallen to 2 per cent while shares in his Mississippi Company traded at fifty times earnings (a 2 per cent earnings yield). John D. Rockefeller has an even better claim than Law to be considered the wealthiest man in history. The fortunes of the robber barons, such as Rockefeller, were amassed in the late nineteenth century when falling interest rates boosted the ratio of American wealth to incomes. Prior to the Great War, the Standard Oil boss was worth 2.6 million times the average annual working American’s wage. When the banker Pierpont Morgan died in 1913, leaving an estate valued at $80 million, Rockefeller commented: ‘and to think he wasn’t even a rich man.’
A little more than a century later, Amazon’s founder Jeff Bezos outdid the mighty Rockefeller with a fortune estimated at more than $200 billion – some 3.5 million times the average American’s income at the time. On the day the internet tycoon achieved this milestone, the Fed funds rate was firmly stuck at zero. Boosted by a low prevailing discount rate, Amazon shares traded on a price-earnings ratio above 100 times, more than twice the peak valuation of Law’s Mississippi Company.
Title: Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least
Author: Antti Ilmanen
Release Date: April 12th, 2022
Rating: 9.5/10
Recommended: Yes
Thoughts: I’ve now read Antti Ilmanen’s book, Investing Amid Low Expected Returns, twice. I read it when it was first released and again over the last month. There’s just so much information jam-packed in there that you learn something new each time.
For full disclosure, I have never read Antti’s first book, Expected Returns, which is a must-read for any aspiring quant investor. Investing Amid Low Expected Returns can be a challenge if you aren’t familiar with basic quant finance terms and ideas, but overall found the book reasonably easy to read and understand.
My biggest (well really only) complaint with the book is that all of the charts and graphs are in black & white or greyscale. That’s fine when there are only one or two elements, but some of the charts have five or more elements and that makes them very difficult to read and understand. This isn’t a problem unique to this book because almost all finance books are like this. But I don’t understand why they can’t have the charts in color. I have no insights into the published business but I can’t imagine it would be all that more expensive and it would dramatically improve the final product (at least in my opinion).
Overall, fantastic book and probably my second favorite of the year after Javier Blas & Jack Farchy’s The World For Sale.
Big Takeaway: There’s so much data in this book it’s hard to pick one or two things. Probably because I’m in Canada and we have a massive real estate bubble, but I found this passage interesting:
I focus here on real estate. Investors used to rising real house prices in recent decades may not recognize the one-off boost from falling real yields. Extrapolating this return experience when real yields on both bonds and real estate are low seems dangerous, just like with equities. After falling sharply around the 2007-9 GFC, house prices have again risen to record-high levels in many markets. As emphasized for bonds and stocks near Figure 2.1, “rearview-mirror expectations’ miss the twin facts that although low real bond yields can justify higher real asset valuations, past realized returns include windfall gains from those yield falls, and current high valuations imply low starting yields and thus below-average prospective real asset returns.
The attribution exercise in Pagliari (2017) is helpful to better understand both historical performance and prospective returns in commercial real estate. I extend his sample period with some years to study the 1978-2020 performance of the NCREIF index (the broad results are unaffected). Figure 5.4 shows that the average gross income yield was 7.6% and the net income 5.1% (so various costs deduct one third from gross). The realized annual growth rate in real rents was -0.8%, reflecting what Pagliari calls “insufficient inflation passthrough” (nominal rental growth does not quite match the general inflation rate). However, this negative term was offset by the windfall gains due to the index cap rate falling from roughly 8% to 4% during the 43-year sample period and to other effects missed by the attribution. Overall, the realized real return of the index was 5.4%, near the average net income.
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