There’s a wonderful Warren Buffett quote that never loses its resonance. “You should invest in a business that even a fool can run because someday a fool will”. Buffett means that he wants the business to be the ‘star’, not the management. A combination of a brilliant business with competent management is likely going to deliver an excellent result. But, even with a fool at the helm, the situation will probably be far from disastrous. Unfortunately, when it comes to government and public institutions, when fools assume control of the bridge, it’s only a matter of time before the ship finds an iceberg. There was a time when politicians, senior government employees and monetary policy head honchos were expected to have a level of competency and for much of the time, they did (sort of). Regrettably, that is no longer the case. The West is plagued with an orthodoxy that counters no dissent and arrogantly assumes it knows best, despite many of its protagonists never having held a proper job in the real world.
I was recently discussing inflation with someone who kindly pointed out that we had been correct to ignore the world’s central bankers who believed it would not go anywhere near multi decade highs and whatever level it achieved it would be ‘transitory’, before soon returning to normal levels. This was what they hoped would happen and what their half baked theories told them would happen but reality has proven to be the complete opposite. Furthermore, having totally lost control of inflation, the prices of just about everything are heading northwards which is prompting workforces to push for significant wage increases, thus aggravating an already serious situation. But that’s the problem with inflation, once it’s escaped getting it back under control is akin to herding cats. Which is why it’s so important to keep it contained in the first place. However, we had a difference of opinion as to whose fault it was. They took the ‘Lemony Snicket’ view, that it was merely a series of unfortunate events. I took the Dostoyevsky angle; it was all the fault of The Idiot(s).
It was Bananarama that sagely informed us “it ain’t what you do, it’s the way that you do it” but perhaps more pertinently, Mark Twain who opined “it ain’t the things that you don’t know what gets you, it’s the things what you know for sure, that ain’t so”. This could have been written for the modern central banker (I’m referring to Mark Twain, not Bananarama) because they think they not only know how economies work but that they possess the knowledge and tools to control them. They believe economies are simple and static but they’re not. Economies are highly complex and endlessly evolving. If you don’t possess the wisdom or humility to acknowledge that, you’re going to come unstuck. And unstuck, they most certainly have. The Fed, The Bank of England, The ECB … all chasing an inflation target of around 2% yet all staring at double digit rates of price increases. As David Byrne and Talking Heads have asked “well, how did we get here?”.
We got here via years of printing money ad nauseum in order to buy debt and therefore fudge the real price of money. It really is that simple. Sure, the financial crisis of 2008 required a response in order to save the banking system. That crisis itself, I would argue, represented a failure of central banking for allowing multiple bubbles and imbalances to accrue but that’s a theme I’ll return to another day. But my central point is that QE was an emergency measure and should have been perceived as such. Its curtailment should have occurred a decade ago but instead, it assumed a status of virtual permanence. Politicians got used to free money and central bank chiefs liked facilitating it because, after all, this is what knighthoods, investment bank advisory roles and lecture tours are made of. Unfortunately, like many things that start out as fun, the consequences can be severe and often show up at the most inopportune moment.
I remember the first lesson of my ‘O Level Economics course (NB for younger readers; ‘O’ Levels pre dated GCSEs in the same way that the wearing of top hats predated baseball caps worn backwards although of course, ‘O’ Levels are much older). The definition of inflation was ‘too much money chasing too few goods’. There, that wasn’t too difficult, was it? Even a 14 year old could understand it. So, why don’t 40/50/60 somethings on monetary policy committees understand it? Because far too many of them are from academic backgrounds where their theories are never truly tested. I’ve nothing against academia per se. I went up to one of the great universities (Bradford) and have a BSc in Economics but how much did it teach me compared to analysing the real world, investing in the shares of real businesses and being a part owner of a real enterprise? Not much, is the answer which leads to another curious facet of modern public life; even when you are useless, you never seem to get fired. If we were as inept as them, we wouldn’t have a business but then, they don’t have to waste their time thinking about such banalities as income, expenses, staff, regulation, delivering a service that people will actually pay for, and what happens to us and our colleagues if we get it substantially wrong.
However, it’s not just in the realms of monetary policy we see staggering incompetence. Take Jennifer Granholm, US Secretary of Energy and a former Governor and Attorney General of Michigan. On paper, she’s a smart cookie but when asked by a reporter how many barrels of oil the US consumes per day, her considered reply was “I don’t have the number in front of me”. If you do not know that number and you happen to be the Secretary of Energy, you should have been relieved of your duties within the hour. For the record and Ms Granholm’s benefit, the figure is around 20m barrels.
But then, you’re never going to get the bullet when your boss conveniently blames high oil prices on Vladimir Putin. Unfortunately, crude was already way up before Vlad’s forces invaded Ukraine, proving it’s an aggravating factor, not a causal one. And on Joe’s first day in office, he cancelled the Keystone XL pipeline, designed to bring heavy Canadian oil south. Team Biden revoked its licence despite Gulf of Mexico refineries being geared to process heavy oil from the Gulf, Mexico and Venezuela. Supplies from these sources are declining, hence the strategic importance of that pipeline. Farcically, Biden has now asked the unfriendly economic basket case that is Venezuela to pump more oil for US consumption. He’s also written to oil refiners accusing them of engaging in price gouging and demanding they provide more petrol. Where do they get the extra oil from? The Keystone XL pipeline, perha……… no, forget that.
The value of investments and any income from them can go down as well as up and you may not get back the amount originally invested.
This material should not be considered as advice or an investment recommendation. Investors should seek advice from an authorised financial adviser prior to making investment decisions.
John Newsome can be contacted on 01423 705123 or john.newsome@williams-im.com. Williams Investment Management LLP is authorised and regulated by the Financial Conduct Authority.
