Friday, September 28, 2012

Slow Burn

I chanced upon  an old friend, Tommy Crown, recently. We were both born in the same decade - and though I was older, he was more senior in all respects. While I was a product of the baby boom, he was a product of one of the golden ages in American film-making. It was good to see him again after all the years that have passed. We've both aged - no doubt - but his theme, The Windmills of Your Mind, remains as enchanting as ever.

Relatively speaking, my life has been ordinary, whereas Tommy's has been both enigmatic and exciting. At least comparatively-speaking for 1968. Then, it was the statesmen, politicians, writers and actors were envied, emulated and placed upon pedestals. Tommy, on the other hand, was a secretive financier. Arbitrage. Foreign Exchange. Private Geneva-based Swiss Banks with numbered accounts. A rarefied world not only unknown to, but obscure and unheard of, by most. He was rich and lived very well indeed. Tailored suits, finest restaurants, art auctions, a large house in the middle of the city with an interior compound complete with full-time butler, expensive cars, thrilling but patrician passtimes (polo, gliding etc.) the secluded beach house. How rich? According to the police, briefing the lovely insurance investigator (played by the lovely Faye Dunaway in a performance only outdone by Chinatown), he was divorced (wife got the kids) and worth... wait for it... FOUR MILLION BUCKS!!!   Messrs. Soros, Simons, Griffin and Cohen would be laughing in their beards should they chance upon Tommy and his feeble net worth now! And yet, despite that money, and  his hobbies, that didn't stop him from getting bored.

But that was more than forty years ago. And during the intervening time, Tommy's fine tastes have, without exclusion, been popularized and lifestyle replicated by all who can, and even surpassed in material terms (Tommy never 'flew private' and  had no insecure nouveau riche desire for 20,000, 30,000 or 40,000 square feet of gold-leafed, mirrored vulgarity or a ridiculuous oversized stinkpot. In fact, HIS beach pad was a an elevated platform set amidst the isolated dunes. During this intervening time, we have seen hot wars and cold wars, double-digit inflation, high double-digit interest rates - both at the long and short ends, recession, the deepest of bear markets and the most exhuberant of bull runs. Market Crashes lasting  months, a week, a day, or just hours. We have endured scarcity and swam in plenty. Suffered quadrupling of our energy staples in short times, and seen it diminish in price by 75%. We've witnessed leaders assasinated like ducks from a blind, airplanes flown into buildings, not to mention several nuclear accidents and meltdowns. We seen arbitrage, foreign exchange, and finance go from being mysterious to a place in our society where every newly-minted Ivy MBA doing an analyst stint at an IB or management Consultancy wants to be Hedge Fund Manager. Statesmen, it would seem, are no longer 'de rigeur', nor the envy of the educated and aspirational class. Oh, and did I mention that we've seen 'inflation'?

Yes, amongst all the volatility and tectonic change, inflation has been (along with environmental degradation, technological innovation) one of the few constants. Tommy Crown probably would have done alright. Some fine Art.  Prime Real Estate - both city and beachfront. A portfolio of Blue Chip Stocks. Some Precious Metals. Oh yes, Tommy's net worth if he stayed the course, wasn't leveraged (in the wrong place(s), at the wrong time(s)), would easily be worth a few hundred million (excluding what he stole in the bank heists). Yes, he probably has a large outstanding capital gains bill, but I trust Tommy structured his affairs to the best of his interests. 

When one looks back, the defining characteristic has been inflation. How unimaginably small his "rich" was. How cheap things were and how generalized inflation -  sometimes pernicious, sometimes benign, occasionally dormant, but always visible in the long run. But rarely if ever in a straight line, and never with a certainty that would encourage anyone to extrememely lever-up to express this process in a trade, or an all allocation outside the most longest of runs. All the while, society, trade, life has not collapsed and returned to barter or descended into Mad Max or Orlovian chaos. The debasement of money while seemingly certain, has not been and likely will not be, mirrored over shorter horizons. It is a slow-burn - not a napalm firestorm. You will read this tomorrow, next week, next month, next year even, and the changes excepting a few oddities -are likely to remain under the perceptive radar, though this is not the rhetoric of the fear-mongering gold bugs (whose asset it must be pointed out is expensive to everything in every currency).  This slow burn effect should make one wary of the imminent hyper-inflative doomsday trade, however compelling the demagogic arguments may appear to buy gold on margin or why silver prices will go to $80/oz this year or some other exponentially higher number next year. 

Make no mistake. When I am Tommy's imputed age, I will likely be worth hundreds of millions of dollars too. But forty years is long long time, and there will be untold and unpredictable wiggles and squiggles enroute that make the concentrated doomsday trade dubious and highly-suboptimal at best, and a royal waste of bluster for its heralding trumpeters.


Anonymous said...

The problem with inflation is that there are significant confounding variables for which there is no accounting.

The history of the Weimar Republic should a lesson to us all. Monitarily, everything was going along more or less the same when suddenly it wasn't. When the evil genie of inflation escapes the bottle of central bank containment, we are all going to beome millionaires.

kristiina said...

A nice post, thank you.

The tangent I'm veering to reading your post is about the idea of value. As I am not an investor, I have to justify somehow what draws me to economic blogosphere. To me, it is the idea of value - the attempt to keep track of what is valuable, not just now but also on imtermediate and long term. An immensely interesting spectacle to watch different parties cheering their favourites, sometimes even deep philosophical insights into the ever-moving character of value. Something that got attention already in the bible. And one of the true questions one can ask of life: What is valuable? Is there something whose value will not change? And for the changeable parts of value: is there some logic in the change? I have my own ideas, but that's easy when one is not an investor. Safe havens are what all want to have for themselves and preferably for offspring, too, but even the best of them only last for a little while.