In this line of work I have been fortunate to meet some of the most interesting and intelligent folks to walk this planet. One such gent I’ve more recently had the pleasure of speaking with on a regular basis is the extraordinarily eloquent mind of Tim Price of Price Value Partners. Some time ago Tim wrote this piece I’d like to share with you. It is as extraordinarily timely right here, right now.
This is not some game. You get noticed, and that gets us noticed. And us being noticed gets us all shot.Josef Gabčík (Cillian Murphy), in Sean Ellis’ 2016 film Anthropoid.
Reinhard Heydrich was without doubt one of the most evil men ever to have existed. Dubbed by Adolf Hitler “the man with the iron heart”, Heydrich helped organise Kristallnacht, a coordinated anti-Jewish pogrom across Nazi Germany and Austria on 9-10 November 1938, and was directly responsible for the Einsatzgruppen, death squads that followed the German army into foreign territory, and which are held accountable for more than two million deaths. Heydrich also chaired 1942’s Wannsee Conference, at which the Nazis formalised plans for their “Final Solution”.
SS Obergruppenführer Heydrich was Heinrich Himmler’s right-hand man. As head of the Reich’s main security office, he was in control of the most terrifying arms of the Nazi regime, including the SD (intelligence), Gestapo (secret police), Sipo (security police) and Kripo (criminal police). Under the guise of Protector of Bohemia and Moravia, he also became known to Czechoslovaks as “the Butcher of Prague”. And on 27 May 1942, Sergeant Josef Gabčík and Sergeant Jan Kubiš from the 1st Czechoslovak Mixed Brigade, under the direction of Churchill’s Special Operations Executive (SOE), set out to assassinate him.
Heydrich would make a daily commute from the centre of Prague to his office in Prague Castle. As a sign of his overconfidence – and of his command over the occupied territory – he would travel in an open-top Mercedes (registration number “SS-3”). At 10:35am, as the car slowed to take a hairpin bend in the road, Gabčík stepped out in front of it, took out a Sten submachinegun, and fired.
The gun jammed. Heydrich vaingloriously leapt out in pursuit, Luger in hand. Kubiš then threw a modified tank grenade at him.
He missed. But the grenade came to rest against the rear wheel and exploded. Heydrich gave chase, but then suddenly collapsed. A piece of the car’s metalwork had shattered one of his ribs and wedged itself in his spleen, together with some of the car’s horsehair upholstery. Himmler, Heydrich’s superior, sent his personal physician, Karl Gebhardt, to attend on him. Although it initially seemed as if he would pull through, on 3 June while having lunch in his hospital bed, Heydrich went into shock. He slipped into a deep coma, and died on the morning of 4 June.
Hitler’s rage was uncontrollable. He ordered widespread reprisals. More than 13,000 were arrested. Thousands more would probably have been killed, but Hitler was ultimately persuaded to limit his fury, if only to maintain industrial productivity in the region, a key engine of the German war effort. Gabčík and Kubiš managed to elude their captors for three weeks, but were eventually betrayed by a countryman lured by the promised one million Reichsmarks bounty. They were ultimately surrounded by 750 members of the Waffen-SS in Prague’s Orthodox Church of Saints Cyril and Methodius. Kubiš died during the subsequent exchange of fire; Gabčík ended up committing suicide rather than be taken alive.
The Nazis vowed revenge. Beginning on 10 June, all males over the age of 16 in the Czech villages of Lidice and Ležáky – erroneously believed to have links with the assassins – were murdered. Several thousands were massacred during the bloodletting. The final tally will likely never be known, nor the precise consequences of the ultimately successful plot. Although the first three true death camps (Treblinka, Sobibór and Belzec) were built after Heydrich’s assassination, his removal from the murderous regime also probably saved thousands of others, emboldened the Czech and wider European will to resist Hitler, and led to the repeal of the infamous Munich Agreement that had parcelled out so much of Czechoslovakia in the first place.
Hollywood, perhaps understandably, has been irresistibly drawn to the story. Within a year of Heydrich’s death, both Fritz Lang (Hangmen Also Die) and Douglas Sirk (Hitler’s Madman) had made films about it. 1975 brought Operation Daybreak. 2016 saw the release of Sean Ellis’ Anthropoid, starring Jamie Dornan, Cillian Murphy and Toby Jones. I can’t speak for the others, but the 2016 version is quite simply shattering to watch, especially as events spiral down to their sombre, inevitable denouement.
One question, above all, remains. In the light of all that followed in its aftermath, was Operation Anthropoid worth it? Could anyone, before the fact, have rationally assessed all the attendant risks?
Happily, as investors, the challenges we face in our day-to-day activities are somewhat more mundane. But the lingering role of risk is ever-present as we try to shepherd our scarce savings and investments from today to tomorrow and thereafter. Some things are forecastable. Others – and Coronavirus seems a reasonable present day example – are not.
So, for investors, what is risk?
The economist Frank Knight published his Risk, Uncertainty and Profit in 1921. In it, he distinguishes between ‘risk’, which is measurable, and ‘uncertainty’, which is not. Consider the difference between rolling dice and attempting to predict the likelihood of a house burning down – which you would have to do as a fire insurer, for example. The probability of dice throws is capable of mathematical calculation (and even then, the actual outcome remains in doubt). The chance of a house burning down: not so much. In the case of the house fire, all we can go on are statistical inferences drawn from observation of the past. Frank Knight:
The import of this distinction.. is that the first.. type of probability [the dice being thrown] is practically never met with in business, while the second [the house fire] is extremely common. It is difficult to think of a business ‘hazard’ with regard to which it is in any degree possible to calculate in advance the proportion of distribution among the different possible outcomes. This must be dealt with, if at all, by tabulating the results of experience. The ‘if at all’ is an important reservation.. the statistical treatment never gives closely accurate quantitative results.
In other words, there are strict limitations in terms of how well investment risk can ever be quantified, in whatever form (whether inflation risk, price risk, credit risk, etc.). Or as the financial planner Carl Richards puts it,
Risk is what’s left over after you think you’ve thought of everything.
To Gabčík and Kubiš, the primary risk wasn’t that they’d get caught – they probably realised from the get-go that they were on what amounted to a suicide mission. The primary risk was that they’d fail to kill Heydrich. For SOE and for the Czech leaders in exile, their primary risk – which they may well have foreseen, but overruled – was the human cost of reprisals against their own people. For investors today, a risk previously unforeseen at the start of the year was not just the spread of a new virus (one that turns out to be not particularly deadly) but how panicky governments would respond to it – namely, by putting their populations under house arrest, by quarantining the healthy, by shutting down vast portions of domestic industry with no certainty of how to reopen them, and then by responding to their own panic measures by fire-hosing money at a moribund economy. As the old Irish joke about a man seeking directions has it, you wouldn’t want to start from here.
Like many, I initially understated the risks of Coronavirus. I underestimated the ability of government to consistently delay making decisions, only to finally decide on doing precisely the wrong thing. I also underestimated the ability of the mainstream media to i) distort, abuse and ultimately traduce the already questionable Covid data emanating haphazardly from government agencies and the dismal Public Health England, and ii) in the process, scare half the population out of their minds. It turns out that you can scare people into staying at home but you can’t so easily bully or coerce them back to work. And as a sign of how arbitrary and wilful government policy now looks, consider two current policies. Shortly after telling everybody to lose weight in order to help save the NHS (again), we will soon receive money off vouchers to eat out at Burger King and Pizza Hut. The optics are dreadful. These are the signs of a government in office but no longer in power.
The economic impact is still too difficult to call. For as long as governments continue to shower the largesse of future taxpayers at an ailing economy, it will be difficult to assess the precise nature or duration of the damage. But it’s already clear that not all sectors in the economy are equal in 2020. The small fraction that stand to benefit from the Coronavirus crisis are in areas like those catering to online delivery or remote working (the likes of Amazon and Zoom, for example – but that doesn’t make them necessarily attractively priced for investors, of course). Commercial property, especially in central London, looks horribly vulnerable to changes in work behaviour that could yet become permanent. But by the same token, premium residential properties in the likes of the Home Counties could easily benefit from a metropolitan exodus. And then there’s a lengthening tail of businesses that will end up being either badly impaired or ultimately broke: hoteliers; chain restaurants; pubs; theatres; travel companies and airlines. Not everybody in hospitality will necessarily suffer – The Financial Times of 26th July carried an article in which Hugh Osmond, the co-founder of Pizza Express, stated that casual dining chains have “no future” – but also reported that Osmond was planning to list a special purpose acquisition company on the New York Stock Exchange in the near future to take advantage of opportunities in upmarket dining venues. This sounds sensible to me. If social distancing is going to become a more permanent feature, premium restaurants are better positioned for the prospect – and their clientele are likely to be less price sensitive in the process. (On a related note, you may find this recent State of the Markets interview on the topic of entrepreneurship with Hugh Osmond’s erstwhile business partner,
Luke Johnson, interesting.)
But the main characteristic of Coronavirus may be that, for all the “new” damage it wreaks upon the economy, its primary impact will be to accelerate trends that we were already experiencing before the virus hit – such as the astronomical build-up in government debts, and the attendant hyper-growth in the money supply required, not least to maintain debt service, globally. Gold and, more recently, silver have certainly been paying attention.
I am continually asked by clients and friends at what price point I intend to take profits on positions in gold. To my mind, this is putting the cart before the horse. Gold is the crucial currency here – the likes of the dollar (and sterling and the euro) will ultimately deteriorate towards their intrinsic value, which is zero. To put it another way, my response is conditional: I will only seek to take profits or otherwise sell gold when the reasons for my having bought it in the first place – notably concerns about the sustainability of global debt issuance – have been successfully addressed. The current expansions in central bank money creation suggest that those concerns, and their related problems, are a long way off from being resolved, irrespective of the near term direction of the gold price. And remember, gold was still a store of value thousands of years ago. No fiat currency has ever lasted so long.
If anything, fears about the US dollar are now gathering pace. The Financial Times made the dollar’s fall to two-year lows (and gold’s not unrelated record nominal high) its lead story on 28th July. The ‘alternative finance’ website Zero Hedge on the same day reported the views of Goldman Sachs’ chief commodity strategist Jeffrey Currie in that an inflationary bias at the US Federal Reserve, combined with heightened domestic political uncertainty, and fears of a second wave of Coronavirus, meant that real concerns around the longevity of the US dollar as a reserve currency have started to emerge.
Well, that change of heart came about suddenly.
I have written several times about my concerns over Modern Monetary Theory (MMT) and how it threatens what remains of any stability within our monetary system. MMT essentially advocates that for any country that has control over the issuance of its currency (EU members take note), it need never worry about internal solvency because it can always simply print more currency to satisfy the notional needs of its creditors. This is technically true, but it overlooks the fact that any fiat currency needs the confidence of its users to maintain its integrity and perception of value in the marketplace. In November 2002, the man who would be Alan Greenspan’s successor at the US Federal Reserve, Ben Bernanke, acknowledged as such in an address to the National Economists Club in Washington:
Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.
Alan Greenspan himself admitted as much:
The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default. Again, strictly true. But again, it glosses over the fact that most if not all Treasury investors will abandon the market if they fear any meaningful loss of purchasing power – through excess currency printing, for example. The only way of locking them into holding bonds is through financial repression.
Enter Russell Napier.
In his latest The Solid Ground advisory, analyst and financial historian Russell Napier takes Stephanie Kelton to task for her recent contribution to the MMT genre, The Deficit Myth:
Having previously described financial repression as a policy that is designed to ‘steal money from old people slowly’, it is very clear why MMT proponents would prefer not to mention the implications for savers from their policies. What politician would endorse a policy that is designed destroy savings, given the socio-political devastation that such destruction has wrought historically ? Perhaps, more importantly, what savers would choose to subject their savings to such theft when it would be possible to move money out of a jurisdiction pursuing a MMT/financial repression policy ?
Longstanding subscribers will appreciate that this last observation forms part of my longstanding scepticism with regard to the EU project, and that in voting for Brexit I was, in essence, merely expressing a preference to depart from a burning building before the roof fell in.
A warning from history. Jens O. Parsson in Dying of Money – Lessons of the great German and American inflations writes as follows:
Everyone loves an early inflation. The effects at the beginning of an inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.
For any investor, there is a whole array of risks that must be borne in mind as potential threats to our savings and investments. Most of the time, we worry about individual, bottom-up risks (default, corporate bankruptcy and so on, and normally just “plain old” price risk). Only rarely do we consider forms of systemic structural risk that we have yet to personally experience.
But nature sometimes surprises. As John Lennon once said (and sang),
Life’s what happens to you while you’re busy making other plans.
I’ve used the following Ian Fleming quotation (from From Russia With Love) before but it’s doubly relevant today:
You think the odds look right, that they are in your favour? This is a billiard table. An easy, flat, green billiard table. And you have hit your white ball and it is travelling easily and quietly towards the red. The pocket is alongside. Fatally, inevitably, you are going to hit the red and the red is going into that pocket. It is the law of the billiard table, the law of the billiard room.
But outside the orbit of these things, a jet pilot has fainted and his plane is diving straight at that billiard room, or a gas main is about to explode, or lightning is about to strike.
And the building collapses on top of you and on top of the billiard table. Then what has happened to that white ball that could not miss the red ball, and to the red ball that could not miss the pocket? The white ball could not miss according to the laws of the billiard table. But the laws of the billiard table are not the only laws in this particular game.
The message from all the above, for all investors, must surely be: expect the unexpected. Always. In other words, ensure that you own a sufficiently diverse array of investments, and where possible in such a way / structure / platform, that even the most incompetent government policy or the most severe exogenous shock won’t sink your portfolio in entirety.
A final, brief observation on risk and return, via Morgan Housel. This deceptively brief tweet contains volumes:
Housing isn’t a great investment but for most people it’s the best investment they will ever make because it’s the only asset they will leave alone and let compound for 10,20,30 years.
To put it another way, the merits of liquidity can be vastly over-rated.
Back, in conclusion, to Operation Anthropoid. Wartime poses uniquely difficult problems. The planners at the Special Operations Executive probably expected what we might politely call ‘pushback’ from the Nazi regime, irrespective of whether Gabčík and Kubiš succeeded in their mission, or not. The assassins themselves would have known that they were likely risking death, but they chose to proceed anyway. SOE and the Czech resistance could not have foreseen the extent to which the Nazis would inflict a terrible revenge on their countrymen – but does that invalidate the mission to kill Reinhard Heydrich – incidentally the only government-sponsored killing of a senior Nazi during the entire second world war? Some think the mission was worth it, for all its cost. “If it wasn’t for Jan [and Josef ], I wouldn’t be here today,” Alois Denemarek, a childhood friend of Kubis’s told the BBC in 2012. “Half the Czech nation wouldn’t be here today. Heydrich had terrible plans for us Czechs.” Perhaps the lesson of Operation Anthropoid is, as it is at all times of hardship and acute stress, simply to expect the worst – but hope for the best, regardless. In light of the events of 2020, every holding in your portfolio should be considered through a very particular prism. By all means think of what your returns might be, but also give some thought to what you could possibly lose.
The story of Operation Anthropoid is one of unspeakable cruelty – but also of unimaginable bravery. It tells of hard choices, of sacrifices by deeply honourable people, of the long shadow of unintended consequences, and of the dangers of arbitrary state power. I hope somebody within the current Cabinet gets round to watching the 2016 film sometime.
Until next time.